WRFest 30Mar08(Business): Days of Reckoning at Hand ! Repent Sinners ?
The alternate title was "Waiting for Armageddon" which happens to be the title of the Economist article looking at what increasing economic pressures will do to corporate performances and bankruptcies. Bear in mind that we're early days yet in the Business Cycle for the downturn and despite all the agita in the credit markets and financials the ripples haven't yet shown up in general business performance. But they will. And given the massive buybacks, re-leveraged balance sheets, and general lack of performance disciplines you can expect, shall we say, some distressed or under-valued buying opportunities. In fact we're not the only ones who see that. The same people who six months ago were sending me invites to new ways to find funny money just sent me their 3rd or 4th on distressed investing:
P.E. Investing in Distressed Companies MasterClass We figure that at any given moment, 5% to 10% of all middle-market companies in North America are either in distress or are significantly underperforming. Every week we see 5 or 10 of them, and we turn most away. Over the next 18 months, in this volatile market, we know it’s going to be hard work to make good decisions -- about choosing good companies, recruiting the right management teams, and actually fixing the companies we buy. Making the right choices will mean the difference between earning just plain decent returns and really great returns. These observations highlight two thoughts -- first, it’s obvious there are thousands of distressed investment opportunities we do not see. And even if we saw everything, there just aren’t enough hours in the day, or dollars in our fund, to handle the avalanche of new situations stemming from the current recession and credit crunch. Second, if you have the skills and experience and resources to consider buying distressed private companies, now is the perfect time to jump in. The door is open, but the ride ain’t free (to quote an aging New Jersey rocker).
Actually they've got a good idea. The trick in sorting the wheat from the chaff is timing, filtering and tools for understanding. So besides the Economist article we added pointers to earlier posts on the subject. In fact we added pointers to relevent posts where we thought they were appropriate. But as you wrestle with the sturn and drang and start looking around check out the readings which cover Materials (Pulp, Coal), Transportation (Trucking, Airlines), Manufacturing (Boeing - a special case we admit, Autos (Ford)) and Retailing (incuding a reprise of our enterprise framework for reference). As you read these don't just read them strictly for the story but also as indicators for their industries and the broader general business climate that's slowly emerging behind the financial rubble.
There will be opportunities here but there's a lot of pain between there and now.
INTRODUCTION
Waiting for Armageddon CAPITALISM without bankruptcy, it is said, is like Christianity without hell. With recession looming, the air in America's bankruptcy courts is thick with brimstone and the coals are being heated in readiness for the many sad souls whose sin was to borrow too much. After several heavenly years, in which bankruptcies fell to record lows, going bust is back. How bad will things get? If the debt markets are to be believed, companies could be in at least as much trouble as they were in the previous two downturns, in the early 1990s and at the start of this decade, after the dotcom bubble burst. The bankruptcy rate (in the previous 12 months) for high-yielding bonds has so far edged only modestly higher, to 1.28% from a record low of 0.87% in November. But most forecasters expect it to rise sharply over the coming months. For instance, Moody's, a ratings agency, predicts that the default rate will rise to 5.4% by the end of this year, mostly due to problems in America. That is a relatively optimistic prediction, for it would merely return the bankruptcy rate close to its long-term average after an abnormally trouble-free period, and it assumes only a mild recession in America. Other forecasters are much gloomier. FridsonVision, a research firm, publishes a default-rate predictor based on the percentage of bonds trading with a spread of at least 1,000 basis points. On March 19th this was forecasting a default rate on high-yielding American corporate bonds of 8.55% by the end of February 2009, compared with Moody's forecast for American bonds of 6.8% for that date.
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MATERIALS
Russian Pulp Punishes Stora Enso, Makes International Paper, Mondi Winners In the new world order for pulp, Finland's Stora Enso Oyj is on the wrong side of Russia. That's making winners out of Memphis, Tennessee-based International Paper Co. and Mondi Ltd. of Johannesburg. Helsinki-based Stora, Europe's biggest papermaker, currently imports Russian logs to turn into pulp. Higher export duties will double the cost of timber from its eastern neighbor beginning next year. While Stora's first mill won't open in Russia before 2011, International Paper and Mondi already operate in the country, the world's second-fastest growing paper market after India.
An Export in Solid Supply A reorganization of the global coal trade is making the United States a major exporter for the first time in years, and driving up prices of the one fossil fuel the nation has in abundance. That flow is part of a vast reorganization of the global coal trade that is making the United States a major exporter for the first time in years — and helping to drive up domestic prices of the one fossil fuel the nation has in abundance. Coal has long been a cheap and plentiful fuel source for utilities and their customers, helping to keep American electric bills relatively low. But rising worldwide demand is turning American coal into another hot global commodity, with domestic buyers having to compete with buyers from countries like Germany and Japan. Environmental concerns have forced some American utilities to cut back on plans for coal-burning power plants. Nonetheless, spot prices for two benchmark American grades of coal, from central Appalachia and the Powder River Basin of Wyoming, have been rising, with occasional dips, since last spring. They eased in recent days but are still up by 93 percent and 64 percent, respectively, in the last year, according to figures from Doyle Trading Consultants and Evolution Markets. How high prices will go, and how quickly the increases will be passed along to electricity customers, remains to be seen. American utility companies buy almost all their coal on long-term contracts, locking in prices for several years.
TRANSPORTATION
Issue #1: Truckers pushed to breaking point The kid who delivers your pizza may be charging you an extra buck for gas, but for the guy that trucked the tomatoes, hauled the dough or milked the cows, passing along the fuel increase isn't as easy as pie. From truckers and farmers to loggers, construction workers and fishermen, skyrocketing diesel prices are pushing what many consider the backbone of the American economy right up to the breaking point.
Fuel Costs Force Delta to Cut Back Delta Air Lines said it will offer voluntary buyouts to roughly 30,000 employees, cut domestic flights and boost its international capacity as part of a business overhaul to deal with soaring fuel prices. Delta Air Lines Inc. unrolled a new plan to cope with surging fuel costs that includes voluntary buyouts, further reductions in domestic flights and a boost to its international presence.In a letter to employees, Chairman and Chief Executive Richard Anderson said the carrier will cut 2,000 jobs through attrition and buyouts being offered to nearly 30,000 of Delta's approximately 55,000 employees. Mr. Anderson noted fuel prices have jumped 20% this quarter, with costs for this year now projected to be $900 million above expectations and more than $2 billion above 2007.Earlier Tuesday, UAL Corp.'s United Airlines said Tuesday its fuel costs will increase by more than $1 billion this year, prompting the carrier to find new ways to cut costs and get more revenue from passengers. Executives at several other airlines last week said they were mulling cost-cutting plans to fight the soaring price of jet fuel, up 30% in the past month. To help cope, Delta will dedicate "more than 40% of our capacity" to international routes, "where fares more readily cover higher fuel costs." That will increase international capacity by more than 15% in 2008 but reduce 2008 domestic capacity by an additional 5% by August, resulting in a 10% year-over-year reduction for the nation's third-largest carrier.
Airlines Face New Reckoning U.S. airlines may face a new round of restructuring amid a stumbling economy and spiraling fuel prices. Consolidation was expected to insulate domestic carriers, but a proposed Delta-Northwest merger expected to jump-start deal making appears to have hit a wall. The airlines have hoarded big piles of cash, estimated at nearly $25 billion at the end of 2007. But while oil prices retreated yesterday, falling $4.94 to $104.48 a barrel on the New York Mercantile Exchange, they remain near all-time highs. And with, jet-fuel prices around $132 a barrel, those cash piles could shrink fast, putting carriers in danger of breaching debt covenants with lenders. For now, the situation isn't uniformly grim. Most of the major airlines were profitable in 2007 as a whole, though several slipped into the red in the fourth quarter because of higher fuel costs. Airlines were successful at pushing through fare increases last year and have negotiated several increases this year. Travel demand also remains strong, with carriers reporting that 75% or more of their domestic seats were filled in January. But Standard & Poor's Corp. recently predicted that "this trend will stall across the industry in the face of softer demand, likely first on domestic routes and then in international markets."
Airline Merger Frenzies (II): Network Structure, Costs and Strategic Outlook
MANUFACTURING
Boeing admits Dreamliner rethink Boeing admitted on Wednesday that it would have to redesign parts of its troubled 787 Dreamliner, raising the prospect of a third delay in recent months to delivery of the new aircraft. The company’s comments came in response to a warning from Steven Udvar-Hazy, chairman of International Lease Finance Corporation (ILFC), the 787’s biggest customer. Mr Hazy told a JPMorgan Chase conference that the state of the Dreamliner programme was “not pretty”. He said first deliveries would be delayed for at least another six months because its centre wing box – which holds the wings in place – needed to be redesigned. Boeing refused to comment on the specifics of the redesign work but said Mr Hazy was not painting an accurate picture of the overall programme. “We are doing some redesign work but things are more complex than what he said,” said Yvonne Leach, for Boeing. “There’s a whole load of things going on.”
Car Makers Prepare for Slump The Big Three auto makers are preparing cost cuts and other measures in case a slumping economy hurts sales more than expected. Turmoil on Wall Street has deepened worries that sales could come in even lower than expected. Car sales: Gear up for steep drop.
Ford Agrees to Sell Land Rover, Jaguar to Tata as Luxury Car Sales Decline Ford Motor Co., the world's third- largest automaker, agreed to sell Jaguar and Land Rover to Tata Motors Ltd. for less than half what it paid for the two brands as demand for the luxury vehicles drops. Tata, India's biggest truckmaker, will pay $2.3 billion, while Ford will pay about $600 million at closing to the Jaguar Land Rover pension funds, the companies said today. Ford is ending its investment in U.K. brands as the U.S. housing slump and job losses curb demand for models such as the $80,000 Jaguar XK. The Dearborn, Michigan-based company, which lost $15.3 billion in the past two years, bought Jaguar in 1989 for $2.5 billion and Land Rover in 2000 for $2.73 billion. Tata will have to resuscitate demand after Jaguar sales in the U.S. and Europe dropped 33 percent so far this year. ``Turning around Jaguar will be a major challenge,'' said Ashvin Chotai, a London-based independent automobile analyst. ``Tata will need to tread carefully and ensure there is no negative impact on these brands.'' Tata buys $2.3B of Ford trouble
OTHER
Starbucks gets back to beans Starbucks is introducing a new automated espresso machine and getting back to grinding beans in its stores as the coffee retailer seeks to re-energize its slumping business.Facing thousands of shareholders eager to hear the company's plans, Starbucks Corp. Chairman and Chief Executive Howard Schultz on Wednesday announced the arrival of the Mastrena, a new machine designed to leave a smaller margin for error in pulling shots and steaming milk. While likely to disappoint some longing for the return of old-school manual machines, the Mastrena is about seven inches shorter than machines in stores now, making it easier for baristas to interact with customers. In an interview before the company's annual shareholders' meeting, executives said the company will also quit using flavor-locked bags of pre-ground coffee next month. Instead, it will grind beans in most of its U.S. stores to bring back the aroma that's been missing since it started using sealed grounds years ago.
WRFest 2Mar08(Business): Paper, Auto and Retail News
Thinking About Retail: Product Profitability and Retail Performance