Warren Buffett likes to joke that when the tide goes out, you get to see who's not wearing a bathing suit.
But when the tide stays out for a long time because of extended economic weakness, you see much more: the flaws that can take a company under for good.
We're going through just such a time. The economy is still weak, and most economists project years of sluggish growth in the next decade. A lot of well-known companies with fatal flaws won't make it to 2020.
Potentially fatal flaws come in many forms. But three crop up the most when you talk to experts: excessive debt, superior competitors and the inability to keep up with technological change. Companies can muddle along with just one of these flaws. But with two or more, look out. A company is probably not a survivor unless it finds a way to flat-out reinvent itself.
Here are seven brand-name companies that may not make it to 2020.
1. Palm
With the Treo, Palm (PALM, news, msgs) was an early pioneer of the move to smart phones. So it doesn't seem right that stronger competitors such as Apple (AAPL, news, msgs) and Research In Motion (RIMM, news, msgs) are now going to crush it. But that could be Palm's fate.Palm can still design popular phones, but it might be too small to survive. In a nutshell, here's what Palm is up against:
- Apple iPhones have a lock on coolness, and apps bring in extra revenue. There are more than 100,000 apps for iPhones, compared with about 400 for Palm phones.
- The business crowd favors BlackBerrys from Research In Motion because of its secure, dependable and easy e-mail system.
- Google (GOOG, news, msgs) is coming on strong with Android, a Trojan horse offered at low cost so that Google can spread its operating system.
Palm remains the midget in this crowd. In North America it has teamed up with Sprint Nextel (S, news, msgs), a tiny carrier compared with Verizon (VZ, news, msgs) and AT&T (T, news, msgs). This disadvantage is unlikely to go away.
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The company declined to comment on this column.
Palm has a market share of just 7%, compared with 40% for Research In Motion and 30% for Apple, according to ChangeWave Research. This means Palm may lack the financial strength, research budget and the marketing clout it needs to survive. "They don't have the scale to compete," says Scott Stevens of Strata Capital Management.
Of course, the Palm brand is certainly worth something. So rather than disappear, the company will more likely be purchased -- perhaps by Nokia (NOK, news, msgs) -- after the stock drifts much lower.
2. Sears
Sears remains one of the great mysteries in retail: It's not clear why it still exists. Yes, we know consumers love Craftsman tools, DieHard batteries and Kenmore appliances. But there's a fuddy-duddy aspect to its stores that makes it a wonder Sears has survived the current decade. Even to aging baby boomers, it's the place Grandma shopped.Yes, Eddie Lampert, the chairman of the hedge fund that owns a controlling stake in the retailer, is a purported financial genius. But Sears and Kmart -- the other retailing dinosaur inside Sears Holdings (SHLD, news, msgs) -- haven't done much to impress investors or consumers since Lampert took charge in 2005.
Shoppers clearly favor up-to-date competitors such as Wal-Mart Stores (WMT, news, msgs), BJ's Wholesale Club (BJ, news, msgs), Costco Wholesale (COST, news, msgs) and Target (TGT, news, msgs).
"In the Sears near my house, you could play roller hockey," says Michael Shulman, a stock analyst with ChangeWave Research, who doesn't believe Sears is viable. Shulman is just joking, of course, but the fuddy-duddy factor of Sears and Kmart stores comes through loud and clear in the grinding sales declines. Besides poor merchandising, Morgan Stanley analyst Gregory Melich blames chronic underinvestment.
Sales at Sears Holdings have declined all year and fell 7.8% in 2008. Since the merger of Kmart and Sears in 2005, sales have declined an average of 3.5% annually, says Morningstar analyst Kimberly Picciola, who expects the trend to continue.
Sears responds that it has "world-class brands," significant cash flow and a strong balance sheet. "We believe we are well-positioned for the future," a spokesman says. The company also says Kmart sales are improving, in part because of the popularity of layaway sales.
Sears and Kmart are also sitting on some valuable real estate. But Lampert sucked a lot of cash out of the company to buy back shares. This propped up the stock but left Sears more financially vulnerable.