BusinessTN

Tennessee is home to 75 publicly traded companies, not counting many banks and small corporations whose shares are very thinly traded. Several are led by CEOs whose performance merits special recognition. In some cases their compensation might seem high, but they can argue that shareholders are getting what they pay for. Business Tennessee drew on its familiarity with Tennessee-based companies and combed through SEC filings, analyst reports and stock charts to identify three CEOs we deem the best in the state.

John Ferguson—Corrections Corporation of America
The state’s former finance chief knew what he was stepping into when he accepted the CEO post at Corrections Corporation of America in April 2000. The one-time go-go stock of the 1990s had crumpled into a heap of conflicts of interest, litigation and empty prison beds. CCA shares, which already had lost 93% of their market value by the time of his appointment, gave up all but the final one percent by the end of that year.

In short order, John Ferguson sold assets to pay down debt, settled class-action lawsuits, renegotiated more than $860 million in bank loans and began raising occupancy rates at the prisons it owns and manages. As CCA board member Henri Wedell told us amidst a Ferguson-led reorganization in the summer of 2001: “CCA has something like 10,000 empty beds. When those beds are leased, this company should turn into a cash cow, just like a hotel.”

He was right—CCA netted $126.5 million, or $3.44 a share, in 2003 on revenue of $1 billion. What gave Wedell confidence to invest millions in CCA shares at a time when many thought the company would sink? A few years earlier, he had been an investor in Community Bancshares, the parent of The Community Bank of Germantown, which Ferguson had been tapped to lead when the bank was reeling in 1990 and which he sold five years later to First Tennessee for roughly $56 million of stock, three times book value.

Ferguson’s experience and credibility has accomplished something almost unthinkable four years ago—he has restored Wall Street’s confidence in the Nashville-based company. And by taking much of his compensation in the form of stock options—525,000 options in the past three years, on top of a salary and bonus that equaled $1 million in 2003—he has done well for himself while restoring some of the lost wealth to CCA shareholders.

Zan Guerry— Chattem
Not all companies are well served by keeping top leadership appointments within the same family, but it hasn’t seemed to have hurt Chattem Inc. The maker of health care products has been led since 1990 by Zan Guerry, whose ancestor Zeboim Carter Patten founded the company 125 years ago as Chattanooga Medicine Co.

Guerry—seconded since 1998 by Chattem’s highly regarded president, Alec Taylor—has presided over a period of con- tinuous success built on sound acquisitions and very aggressive advertising (including frequent endorsements by such celebrities as Joe Montana and Larry King). Since the beginning of 2000, Chattem shares have nearly tripled in price to a recent $27, much to the benefit of Guerry, who is the third largest shareholder with a 1.32 million share, or 6.8%, stake.

Guerry has acquired numerous, widely known, niche brands, including Gold Bond creams and powders, pHisoderm, Selsun Blue and Sportscreme. Avondale Part- ners analyst Douglas Lane identifies Chattem’s Dexatrim All-in-One Nutrition Bar and its Icy Hot Sleeves as potential home run products.

Despite advertising spending equal to 30% of sales, the company’s margins are ample. As is Guerry’s compensation, which appears justified in view of his results—in 2003, he was paid $758,000 in salary and bonus, was granted $1 million of restricted stock, 125,000 stock options and was given $668,391 to cover the tax consequences of the restricted shares. Last year, Chattem earned $23.4 million, or $1.19 a share, on sales of $233.7 million.

David Stevens—Accredo Health
David Stevens has presided over Accredo Health from the time of its 1996 sale by LeBonheur Health System, through its 1999 initial public offering at a split-adjusted $7.10 a share, until the present when the shares are pressing the $40 level. The improbable transition from being a unit of a not-for-profit children’s hospital to emerging as a lucrative publicly traded company has been smooth, except for one period of unpleasantness—a short-lived cratering in the share price from $40 to $14 a year ago. Even so, the shares have vastly outperformed peer health care stocks.

Memphis-based Accredo is a specialty pharmacy benefits manager focusing on treatments for such costly, chronic diseases as Multiple Sclerosis, Gaucher Dis- ease and Crohn’s Disease. In addition to payments for dispensing drugs, the company also receives fees from consulting services rendered to biopharmaceutical makers.

Through a steady stream of shrewd acquisitions, Stevens has created a biotech mutual fund of sorts and tripled revenue to $1.34 billion over the past three years, generating earnings of $29.5 million in 2003. The one blemish was a major miscalculation of the health of accounts receivable picked up in the $465 million acquisition of a company from Gentiva Health Services in 2002. Ten months after the deal closed, Accredo announced a $49 million charge for doubtful accounts. Stevens, an accountant by training, promptly fired and sued Accredo’s auditor, Ernst & Young.

Shareholder pain was brief, as Stevens’ other acquisitions have performed well enough to require the payment of performance-based earn-outs to the sellers. In a deal sure to add to earnings and to give it some protection from being squeezed out by larger pharmacy benefit managers, the company announced in February a 10-year agreement with Medco Health to become its preferred specialty pharmacy provider.

An added attraction—Stevens’ services come at a comparative bargain. Last year he was paid a bit over $500,000 in salary and bonus and received 75,000 stock options. He owns 856,000 shares, or 1.8% of Accredo shares outstanding.

Buffett’s Tennessee Bargains
by Richard Daverman

All other things being equal, Warren Buffett, famed stock picker from Omaha, would prefer owning companies to owning stocks. But necessity dictates, and he will buy whichever is cheaper.
So the fact that he has made three substantial investments in Tennessee companies—one in each of the state’s grand divisions—means only that he thinks he’s found some bargains.

In Memphis, Buffett’s Berkshire Hathaway acquired in early 2001 a 2.45 million-share, or 7.1%, stake in Mueller Industries (MLI), a NYSE-listed manufacturer of metal and plastic tubes, fittings and valves—a basic industry that supplies homebuilding, a Buffett theme. Not glamorous, not trendy, but a business that he can understand—always a criterion for the savvy, disarmingly folksy guru.

In the Midstate, Buffett holds 3.4% of HCA’s stock, mostly through Berkshire’s auto insurance unit Geico. Here, the consistent Buffett themes are the company’s pre-eminent position and heavy cash flow. Buffett doesn’t typically project into the future, but it’s hard to overlook the inexorable aging of the U.S. population and the associated medical costs.

In East Tennessee, Buffett paid $1.7 billion last August for Clayton Homes, a leader in the manufactured housing industry, the only Tennessee investment he holds outright. He said that a bad investment in competitor Oakwood Homes set him up for the investment. For him, a good company was hurt by too-easy lending practices, putting a glut of repossessed homes on the market.

Buffett’s Tennessee holdings are neatly dispersed over the state. But that’s not one of his investment criteria. They were just bargains.