10 On the Spot
These CEOs are facing Herculean challenges--and investors hand them a report card every day at 4 P.M. Here's what's ahead for their companies and their stocks.
by Jon Birger and David Stires

(FORTUNE Magazine) - Charles Prince Citigroup (C, $47)

Age: 56 Tenure: 2 years; 2004 pay: $11 million

Challenges--Prince's legal training is coming in handy: He's spent much of the past two years paying fines and negotiating settlements for Citi's role in financing Enron and other fraud-ridden outfits. Now the CEO has to produce internal growth at a company that has long expanded through acquisition, with two handicaps: A lot of experienced managers have departed, and rising short-term interest rates are squeezing margins for all banks.

Opportunities--Citi may be the biggest and most diversified financial services firm in the world, but it still has huge avenues for expansion, particularly overseas, where it has only a low-single-digit share in most markets. Prince plans to open hundreds of new branches in foreign countries this year.

Stock Outlook--We chose Citi as one of the top picks for 2006 in our recent Investor's Guide. The stock is down $3 since then, but we haven't changed our mind. The company is at the top of virtually all its businesses, ranging from credit cards to retail banking to brokerage services. Moreover, it just hiked its dividend for the 21st consecutive year, bringing its yield to 4.3%, one of the highest in the industry.

Note: Pay is last reported full-year salary and bonus, unless noted.

Neville Isdell Coca-Cola (KO, $42)

Age: 62; Tenure: 21 months; 2004 pay: $3.7 million*

Challenges--Isdell, Coke's third CEO since 1997, needs to wean Coke off ... well, Coke. After years of steady expansion, mostly overseas, soda has become a zero-growth business. But carbonated soft drinks still account for 85% of Coke's profits. Finding businesses with margins as sweet as soda pop's isn't easy. And running the world's largest beverage company, with a market value of $100 billion, Isdell has to hit some very big home runs to make any impact.

Opportunities--Isdell's most valuable resource is Coke's massive network of bottlers, which spans some 200 countries. Isdell is launching hundreds of new products, hoping to make big inroads with noncarbonated beverages like Full Throttle and Rockstar energy drinks. And he appears to be warming to the idea of using Coke's $5 billion cash hoard for acquisitions that would diversify the company into food and other consumer goods.

Stock Outlook--Coke shares have fallen about 20% from their 2005 high and now sell for 19 times trailing earnings, on a par with the S&P 500. It's not a terrible price for a stock that typically trades for a premium. But it's hard to see how the company is going to generate any excitement soon.

*Salary and bonus for seven months.

Paul Pressler GAP (GPS, $17)

Age: 49; Tenure: 3 years; 2004 pay: $2.6 million

Challenges--Gap's clothes have lagged the trends, and its product mix has been off, which has dragged down same-store sales 13 of the past 14 months; the stock fell 18% over the past year. An exodus of executives, inconsistent marketing messages, heavy discounting, tired-looking stores, and tough competition have put Pressler in a precarious position.

Opportunities--To revive the Gap brand, Pressler's hired a new fashion director and marketing chief. And he's testing a more colorful store concept to replace Gap's stark boxes. He's made sure that the stores are starting the year with lean inventories; that, combined with a new system to source goods closer to stores to speed deliveries, should help reduce the need for discounting.

Stock Outlook--Gap has a strong brand, and the stock is cheap; it trades at a P/E of just 14, vs. an average of 19 for the S&P specialty retail index. But we would be cautious right now. Pressler has proved he can cut costs and improve operations but has yet to show his mastery of merchandise. Retail analysts didn't see a dramatic improvement in Gap's spring lines but are hopeful the fall collections will be stronger.

Richard Clark MERCK (MRK, $34)

Age: 59; Tenure: 10 months; 2005 pay: $1.1 million*

Challenges--Much of Merck's future will be determined in court: Clark has set aside nearly $1 billion to cover just the legal fees associated with the flood of lawsuits blaming Vioxx for heart-related ailments and deaths. And that's not his only worry. Merck is facing the loss of patent protection on several key drugs over the next five years, including the $4-billion-a-year cholesterol medication Zocor--with few potential blockbusters coming along to replace them.

Opportunities--Clark laid out his recovery plan in December. He'll cut $5 billion in costs by 2010 and get more aggressive about strategic acquisitions. He'll focus R&D efforts on nine priority areas, including Alzheimer's, diabetes, cancer, and vaccines.

Stock Outlook--Given the uncertain Vioxx liability and the murky outlook for earnings--Goldman Sachs doesn't expect any growth until 2009--we wouldn't buy the stock today. But if it fell below $30, we'd be tempted by Merck's dividend ($1.52 a share) and the potential for a breakthrough drug launch. (Gardasil, a vaccine for cervical cancer now awaiting approval from the FDA, may be the company's best hope.)

*Salary only.

Steve Ballmer MICROSOFT (MSFT; $28)

Age: 49; Tenure: 5 years; 2005 pay: $1 million

Challenges--Ballmer is wrestling with Microsoft's perpetual problem: extending its near-total dominance of operating systems into the Internet era. Google owns the Net: The search titan already offers several web-based programs, allowing users to do everything from send digital photos to create weblogs--all without applications from Microsoft. And the software giant's effort to become the core of the digital home faces fierce competition at every turn from Apple, Sony, Samsung, and others.

Opportunities--Microsoft is launching "live" versions of the company's Windows operating system and Office software that are transmitted over the Internet, not stored on a PC. Assuming these products are designed well--and quickly--they could dramatically expand Microsoft's reach. Videogame machines, high-end servers, and other tech goods also offer moneymaking opportunities.

Stock Outlook--Microsoft is rolling out a slew of new products this year, including the latest upgrades of Windows and Office. And those franchises are still huge cash machines. But its shares no longer deserve the rich premium they once enjoyed. At 20 times trailing earnings, the stock is priced about right.

John Mack MORGAN STANLEY (MS, $61)

Age: 61; Tenure: 8 months; 2005 pay: $11.9 million

Challenges--With talent fleeing and conflict roiling the firm, Morgan's board brought back John Mack last summer to restore calm. So his top priority must be to resolve the long-festering culture clash--dating from the 1997 Morgan--Dean Witter merger--that contributed to the downfall of predecessor Phil Purcell. He also needs to revive several important operations, including a stagnant Discover card business, a disappointing brokerage arm, and a lagging asset-management unit.

Opportunities--Mack has plans to grow just about all aspects of the business: private equity, derivatives, emerging markets. A rumored deal to buy a controlling stake in $450 billion bond-fund manager BlackRock would be an important addition to Morgan's lineup, provided Mack doesn't overpay.

Stock Outlook--Shares are up almost 15% since Mack's return. They're not likely to rise fast from here. Mack's ambitious plans will be costly, requiring major restructuring charges and spending on acquisitions. And it could take two or more years to see results. We'd avoid the stock for now. If you believe in that old Mack magic, wait for a dip, buy, and be prepared to hold on.

Mark Parker NIKE (NKE, $83)

Age: 50; Tenure: New; 2005 pay: $2.4 million*

Challenges--Beware the fury of a frustrated founder. In January Phil Knight ousted CEO William Perez, his handpicked successor, after only 13 months on the job and replaced him with Parker. A Nike lifer, Parker has to grow the company internationally and build the company's other brands such as Converse, Starter, and Cole Haan. And he has to hope Knight grants him the autonomy Perez claims he never got.

Opportunities--You wouldn't know there was turmoil at the top based on the numbers. Earnings were up 25% last year, and the stock is near an all-time high. Parker can build on Nike's success in women's apparel, make more inroads into the European soccer market, and turn Nike's presence at the 2008 Beijing Summer Olympics into a Swoosh coming-out party in China.

Stock Outlook--Nike is trading at 17 times trailing earnings--well below its ten-year average. Still, the Adidas-Reebok merger may create a more potent competitor. And as Citigroup analyst Kate McShane notes, with a third of Nike products sourced from China, further appreciation of the yuan could drive up costs and squeeze profit margins.

*Salary and bonus as president of Nike.

Howard Stringer SONY (SNE, $50)

Age: 64; Tenure: 8 months; 2005 pay: Not available

Challenges--At least he didn't sugarcoat it. Last year, when Stringer announced his restructuring plan for the beleaguered giant, he compared Sony's plight to that of the Russian army defending Moscow against Napoleon. "To stay ahead of the invaders ... we must be Sony united and fight like Sony warriors," said the Welsh-born Stringer. Sony was losing the television wars to Sharp, its Walkman line was being crushed by the Apple iPod, and Sony's bloated management made it hard to launch a counterattack.

Opportunities--Stringer's solution: get out the ax. Last September he announced plans to shutter 11 production facilities, slash 10,000 jobs--7% of Sony's global workforce--and trim product lines to focus on core offerings. Profits topped expectations in the latest quarter, thanks in part to surging flat-panel-TV sales. Now Sony is looking to the launch of the PlayStation 3.

Stock Outlook--With Sony ADR shares up more than 50% since November, the market obviously likes what Stringer is selling. Still, with Sony now trading at 46 times trailing 12-month earnings, we're not sure why the stock is worth more than Apple at 42 times or Samsung at 15.

Ivan Seidenberg VERIZON (VZ, $32)

Age: 59; Tenure: 7 years; 2004 pay: $4.9 million

Challenges--Seidenberg's onetime monopoly is under siege from cable companies and other competitors, which are siphoning off his core fixed-line phone customers at an alarming rate. He's in a low-margin business that requires near-constant multibillion-dollar infrastructure upgrades--witness the company's huge $32 billion debt load. And he needs to begin the messy process of cutting costs at MCI, which Verizon acquired for $8.5 billion in January.

Opportunities--Seidenberg's aggressive push into broadband will give him access to six million potential customers by the end of 2006. If he can sign up a sizable chunk of them for high-speed Internet and video services, he may be able to keep rivals at bay.

Stock Outlook--Even under the most optimistic scenarios, revenues from broadband services are unlikely to offset declining local-phone sales. Verizon's prized wireless unit outperforms its rivals in the pack, but mobile-phone growth is slowing. Much of this bad news is already priced into the shares, which have tumbled 25% from their 2005 high. Given Verizon's strong cash flow, this is a stock to own for its rich dividend yield--now 5.2%--not big price gains.

Lee Scott WAL-MART (WMT, $46)

Age: 56; Tenure: 6 years; 2005 pay: $5.4 million

Challenges--Lee Scott's mandate is simple--and seemingly impossible: continue producing double-digit growth at a company that already boasts nearly a third of a trillion dollars in yearly sales. To achieve 10% annual revenue growth, Wal-Mart needs to increase sales by $90 million every day. And employee lawsuits, union scuffles, and local opposition to new stores have turned Wal-Mart--once regarded as a model corporate citizen--into a media punching bag.

Opportunities--Smarter public relations should lead to fewer bruising battles over new stores--particularly in California, still relatively untapped. Another growth market is Latin America; Wal-Mart has made recent acquisitions in Brazil and Central America. Scott is targeting middle-class consumers by introducing more upscale product lines, such as high-thread-count sheets.

Stock Outlook--We see a buying opportunity. Since 2002, earnings are up 76% and the stock is down 28%. Says David Katz, who owns the stock in his Matrix Advisors Value fund: "This is a company we'd always looked longingly at but never owned because it was so richly priced. Until now." Top of page

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