Fitch Ratings says food retailers’ increasing investment in their own brands will provide formidable competition for US packaged food companies in the near term. “However, companies such as H.J. Heinz (NYSE: HNZ) and General Mills (NYSE: GIS) have effectively competed with high market shares of private-label products in Europe for decades and believe that they will have similar success in the United States.
- Kroger (NYSE: KR) has had significant success with its private-label program, with 27 % of its grocery sales and 35% of unit volume coming from its store brands in the fourth quarter, up from 26% and 32%, respectively, in the prior year.
- Safeway (NYSE: SWY) intends to drive corporate brands harder if packaged food companies do not lower their prices.
- Wal-Mart (NYSE: WMT) is revamping its Great Value brand by introducing new products and reformulating 750 other products. Great Value is the country’s largest food brand in both sales and volume.
All the major packaged food companies make at least 10% of their sales to Wal-Mart, so it is a concern that as Wal-Mart increases shelf space for its own products, it is likely to reduce space for national brands from packaged food companies.
Overall, Fitch say negative factors are beginning to outweigh positive factors for U.S. packaged food companies, which have maintained adequate liquidity and access to capital during the recent instability in the credit markets. Most companies in the sector are expected to exhibit growth in operating earnings and cash flow, as well as discretionary free cash flow.
Fitch expects that companies that currently have weaker credit metrics for their rating levels, including Kraft Foods (NYSE: KFT), H.J. Heinz (NYSE: HNZ) and General Mills (NYSE: GIS), will improve credit metrics in the near term. However, they are more likely to have a negative rating action if their earnings falter materially, unless debt is reduced commensurately.
For details, see What Is in Store for U.S. Packaged Foods?
Forrester Research takes a look at the longer term implications of U.S. consumers delaying medical care in the current economic recesssion.
Healthcare is often considered a “recession-proof ” industry because, regardless of the state of the
economy, people get sick and therefore need healthcare products and services. However, Forrester found that:
- Delaying care is on the rise. In 2006, approximately one in five US households reported having put off or avoided treatment due to cost concerns. By 2008, that figure was up to almost one in four.
- The uninsured are the most likely to delay care. Non-elderly (younger than 65) uninsured consumers are the most likely to put off or forgo treatment for cost reasons.
- Seniors increasingly delay care. The percentage of elderly consumers (65 and older) covered by government and/or commercial insurance who delayed care increased by 67% from 2006 to 2008.
While delaying care saves money in the short term, it often costs huge sums in the long run. Why? Because conditions that go untreated can lead to major complications requiring more involved treatment.
As a result, Forrester predicts that “Value-Based Insurance Design” will proliferate. VBID plans build incentives and condition-based cost controls into plans by tying varying deductibles to preventive care or reducing copays based on the severity of the member’s condition. In addition, hospitals and other institutions will get more involved in community care.
For details see: Consumers Delay Healthcare Due To Economic Woes.
High input prices and the economic recession are coming home to roost in U.S. agriculture, with more than 80 percent of agribusiness professionals surveyed expecting financial stress for farmers to be high or very high over the next three years.
The survey, released by the University of Minnesota’s Center for Farm Financial Management, took in 2,300 agricultural lenders, insurers, businesses and educators across the U.S. in January.
The major factors contributing to financial stress were input price hikes, commodity price volatility and negative cash flow, followed by inadequate business planning and poor financial management skills.
Interestingly, only 17 percent of respondents reported a substantial increase in documentation required of farmers seeking loans, while 56 percent reported a slight increase in required documents.
Last month, we highlighted Moody’s Investors Research’s negative outlook for the food industry. Moody’s said relatively high input prices combined with slowing sales would crimp cash flows, possibly leading to bankruptcy for some food companies.
Bottom line: The challenging environment for agribusiness is expected to persist for as long as pricing remains volatile and revenues constrained by recession.
Despite protectionist and economic pressures, the European Union is not likely to suffer political ruptures and could even emerge from the recession stronger than before, according to Oxford Analytica.
The global crisis has fomented disagreement among EU states over the handling of the economy, trade and protectionism, leading some to predict political crisis for the union. Among the concerns:
- The “one size fits all” unified currency has hamstrung individual European nations in their efforts to combat the credit crisis.
- There isn’t sufficient political unity behind the monetary union, evidenced by the German-led rejection of a Hungarian proposal to bail out Eastern European nations.
- European Parliament elections to be held in June have fostered political uncertainty about the future path of the European Commission.
- Nationalist trade measures, e.g. protectionism, threaten to usher in another era of 1970’s-style “Euro-sclerosis,” where European states turn inward and growth stagnates.
But Oxford Analytica, in “Integration Will Survive Economic Test,” argues the fears are exaggerated.
Though European integration is set for a period stasis while the crisis endures, measures agreed so far — and the fact that the EU was expected to act even where it had limited powers – suggest that it could emerge strengthened when the crisis comes to an end.
Self-interest argues for preserving the union, given the tragic outcome for Iceland, a small country on the fringe of the EU.
Oxford Analytica points out that Iceland has a renewed interest in joining the EU, and Eastern European countries are trying to accelerate their admission to the union.
Executives at American International Group aren’t the only ones being asked to adjust to a new “normal” in executive compensation.
A survey of 227 U.S. companies in February by accounting firm Grant Thornton LLP found that half the firms have frozen executive base pay and 15 percent have cut salaries. Think your bonus will make up for that? Think again.
- For 69 percent of the companies surveyed, payouts on 2008 bonuses are below targeted levels.
- For 27 percent of the companies, no bonuses are being rewarded at all for 2008.
- 2009 bonus budgets are the same or lower than 2008, the companies said.
- More than half the companies reported that 75 percent of their stock options were “under water,” and half have reduced the number of options granted in the first two months of 2009.
Companies are expecting 2009 to be a challenging year for business growth and financial stability. As they recast business plans for leaner times, this is impacting executive compensation programs dramatically.
Interestingly, public companies and private companies are approaching the problem differently, Grant Thornton found. About one-third of private companies versus one-fifth of public companies are paying no bonuses for 2008, for example.
The full report is available free at the Grant Thornton Web site.
As U.S. Treasury Secretary Timothy Geithner is proposing new “rules of the game,” e.g. much tighter regulation of heretofore unregulated entities, perhaps the least surprising aspect of the plan is the requirement that all derivatives be traded on a regulated exchange.
Regulators and the over-the-counter derivatives industry have been moving in that direction for months now, as participants recognize the need for uniformity and transparency in the wake of the credit-default swaps debacle that brought down insurer American International Group (NYSE: AIG).
The International Swaps and Derivatives Association is currently gearing up for a new framework for trading and clearing North American corporate CDS transactions, set to take effect April 8, according to a report by law firm Paul Weiss.
The new framework is aimed at further streamlining the market and preparing existing and future CDS trades for central clearing.
The ISDA has also published updates to its 2003 rules, referred to as the 2009 Supplement and the Big Bang Protocol, that have three main objectives:
- The establishment of credit derivatives “determination committees” for five ISDA regions, including the Americas, Japan, non-Japan Asia, Australia-New Zealand and EMEA (Europe, Middle East and Africa), to help resolve disputes.
- The launch of a standarized CDS auction settlement process across different credit derivatives transactions and credit events.
- The creation of 60-day credit event and 90-day succession event backstop dates for credit derivatives transactions to close a loophole that currently leaves investors exposed to basis risk.
The new framework for North American CDS that begins April 8 will result in more standardized trading and even a new acronym, “SNACs,” which stands for Standard North American Corporate CDS trades.
Dealers will be required to quote fixed coupons and upfront payments on SNACs and the contracts will have a standard quarterly termination date, similar to those for exchange-traded derivatives, of March, June, September and December, Paul Weiss said.
Legacy corporate CDS in North America will not fall under the new standards.
U.S. auto suppliers, some of which were facing imminent collapse according to Standard & Poor’s Credit Research, will get a significant reprieve from their cash flow troubles as a result of the Treasury’s plan to provide $5 billion in aid.
But the ratings agency writes in a new commentary that the reprieve will be short-lived and will not help the long-term ratings of most of the suppliers.
The crux of the plan is that auto suppliers could sell their receivables to the U.S. government, thus easing an immediate cash flow crunch. But it’s far from a panacea, as the suppliers are simply getting payment for the parts ordered by automakers earlier than the usually 60 days.
The financial vulnerability of the U.S. automotive sector is evident in our ratings: Nearly half of the original equipment suppliers that we rate have ratings of ‘B-’ or lower, and a third are in the ‘CCC’ category. These ratings imply significant default risk in the near term, and we believe smaller, unrated suppliers are generally in even worse financial condition.
For example, Delphi Corp. remains in limbo, unable to exit bankruptcy or secure an extension of its debtor-in-possession funding ahead of a June deadline.
Bloomberg News reports that Citigroup (NYSE: C) may be the Treasury’s choice to implement the $5 billion program, and will likely work with General Motors (NYSE: GM) and Chrysler LLC to determine how the funds are dispersed among auto suppliers.
Bottom line, according to S & P, is that the “continuation of low and volatile production by the automakers is a far more serious problem for suppliers because it could erode their liquidity even with their newfound ability to sell receivables.”
The performance of auto loan securities has been mixed, but Standard & Poor’s Credit Research points out that overall ratings on the ABS have been remarkably stable in spite of the recession.
In a new report on the sector, S & P says that delinquencies and write-downs among certain auto loan ABS, vintage 2007-08, have outstripped the peak losses of 2000-01. Even so, S & P has downgraded only one transaction this year due to collateral performance.
In our view, the weak economy, combined with reduced investor appetite for ABS, has caused many securitizers to curtail loan volume and underwrite loans for borrowers with better credit and at lower advance rates.
Similarly, Fitch Ratings says the robust structures of many auto ABS are allowing them to build “credit enhancement” despite higher losses. In fact, Fitch announced nine upgrades of auto ABS in February.
As for credit card ABS, as many consumers know, issuers are cutting underlying credit lines and increasing rates on existing balances – moves that are preserving credit quality on those securities.
On the other hand, student loan ABS were under considerable rating pressure in February, with Fitch downgrading 56 rated securities.
Overall, downgrades on the long-term ratings reflect the effect of increased funding costs on the transaction due to failed auctions [and]..follow a review of all auction-rate transactions to determine the ability of each to withstand increased funding costs going forward.
For more details, see “Term ABS Credit Action Report: February 2009.”
This guest post by Alacra CEO Steven Goldstein originally appeared on the Alacra Blog
Watching the flow of research on stocks can be fascinating. Take the recent case of Sun Power (SPWRA), a manufacturer of solar power products with a $2 billion market cap:
On January 27, two days ahead of the fourth quarter earnings announcement, three analysts cut their 2009 earnings forecasts for the company: Mehdi Hosseini of Friedman Billings, Jeff Osborne of Thomas Weisel and Mark Bachman of Pacific Crest. Eric Savitz of Tech Trader Daily had an excellent roundup of the coverage
On January 29, as reported again by Tech Trader Daily, Gordon Johnson of Hapoalim Securities initiated coverage on SPWRA with a sell recommendation and a target price of $15.00. The stock was trading at around $30.00. Savitz remarked, “That’s pretty bold timing, given that the company should report Q4 results today after the close.”
The Company reported after the close that day and rallied; revenue and earnings exceeded the Street’s estimate. They did not give any guidance for the first quarter. So it seems as if the analysts were expecting weak numbers and made their calls prior to the earnings announcement, only to have SPWRA rally in their faces.
Fast forward to March 11. At a Raymond James conference, SPWRA CFO Dennis Ariola reduced first quarter guidance, leading to analysts cutting estimates and stock getting clobbered. The next day JP Morgan analyst Christopher Blansett cut his rating and moved his target price to match Gordon Johnson’s $15.00.
Yesterday, Collins Stewart analyst Dan Ries initiated coverage with a sell rating, and a $20.00 price target. The stock closed at $23.95, down 84 cents and almost $6.00 from where the original set of analysts made their sell recommendation.
A couple of observations: First, Johnson’s calling for a 50% drop in a stock’s price on the day of an earnings announcement strikes me as not only “bold” but curious too. But he and the other analysts saw something important pretty much simultaneously. I can’t see what value Johnson’s timing had, given the other analysts’ forecast cuts a couple of days earlier. Second, the method by which the Ariola changed guidance was unusual to say the least, as Savitz pointed out in his coverage: “From a Reg FD perspective, this certainly seems like an odd way to adjust guidance.” Third, while research directors want their analysts to do their own thing, time and time again you see evidence of a herd mentality. Lastly, Eric Savitz does a terrific job summarizing and analyzing Street research on tech companies.
Revenues across European consumer food, beverage and tobacco companies are expected to be flat in 2009, but profits could be under further pressure due to the weakening of the euro, and despite the decline in most commodity prices in the second half of 2008, according to Standard & Poor’s Credit Research.
Among the trends noted in S&P’s just-released Industry Report Card on the sector:
- Retailers ran down inventories in the fourth quarter of 2008.
- The volume declines were the worst for products with longer shelf lives, suggesting that retailers ran down inventories to preserve cash — not a good sign for early 2009 trends.
- Central and Eastern Europe bore the brunt of the volume declines.
- For the most diversified consumer goods manufacturers, volume declines were offset by product mix and “positive pricing.”
- Gross margins are likely to remain under pressure in spite of commodity price drops.
The consumer goods sector remains sharply polarized in terms of liquidity and investment funding: While the nondurable and relatively noncyclical food, beverage, tobacco, and personal/household goods manufacturers retain preferential access to funding, durable consumer goods manufacturers remain vulnerable and show widespread signs of financial distress.
As the following chart from S&P shows, downgrades have been more prevalent in the non-investment-grade area and the default rate was 20 percent among the 20 junk-rated European companies.
Among developments that are positive for credit ratings in this sector, S&P cited the widespread suspension of share buyback programs.