Interview: BB&T Capital Markets
>> the federal reserve raised rates for a seventhth straight time. energy prices remain elevated and there’s greg concern over consumer―growing concern over consumer strength. joel havard is senior vice president of research at bb&t capital markets and joins us with a look at what’s ahead for the consumer. thank you very much for joining us. people have been looking for greenspan’s conundrum, the effect on the economy of higher interest rates for some time.% -you think you see it in consumer durables?
>> we’ve been concerned about this since q-1 last year when the talk turned to higher rates. as those have unfolded, we’ve seen the historical dynamic play itself out whereas rates have moved up, multiples have moved down, in this case, probably more than half of the historical gap down, which has been from a high teens to a very low teens. we’re in the mid teens right now from a forward multiple standpoint.
>> we’ve seen gasoline prices, as we mentioned, at record highs. but consumer spending hasn’t fallen off all that much and economists are puzzles. why is consumer spending in this sector going it fall, then?
>> going to fall? it’s still debatable. i think there are a couple of external factors. the industry is dealing with the onslaught of globalization. probably the last consumer durable sector to have to do so where autos, electronics and textiles have been dealing with these dynamics for years. so as that plays out, these companies are learning to play by a new set of rules. the impact of rates in general, gas prices in particular, we think will have some pressure on the group. if someone were making a sector call, it’s easier to be negative than positive. as we’ve spoken about before, we think there are always companies with opportunities that are unique enough to warrant attention.
>> let me ask you what some of those companies might be.
>> three of our favorites right now are la-z-boy, american wood mark and craft mark international. la-z-boy, the leading residential furniture maker in the country. they’ve spent the last three years unwinding a series of problems they got into unfortunately on their own but with a couple of strategic challenges thrown at them in the process. we think this will involve unwinding a couple of acquisitions that were perhaps ill-timed. they’re cleaning up the retail side of their business. we think the platform for earnings acceleration is starting to present itself. they’ll wrap up their april year end in the next few weeks and we think the acceleration from 2005 to 2006 earnings is attractive from the 80-cent range to $1.35.
>> we did see a record home sales year in 2004. new home sales, again, up today. that won’t balance off the problems seen in higher gasoline and energy prices?
>> certainly. housing, we think, will do whatever it does. and from historical peaks, it’s more likely than not in a higher rate than stiffer consumer spending headwinds, then we could see housing trends ease. that doesn’t necessarily hurt home furnishing. historically, the gap between a housing turnover event, a family moving into a new built or existing home they’ve purchased, typically there’s a year-plus lag before they really start spending money on their home. typically it takes that long to get finances back in order after taking on what, for most consumers, is the biggest familiar event of their life.
>>. that housing dynamic play into american wood mark. that is aimed at the big remodeling boxes, home depot and lowe’s in particular. they have grown three to four times over their peers in the last three or four years.
>> let me ask you quickly, beforey we let you go, we’ve been talking about the effect of higher prices on consumers, but what about on the companies? are they able to pass these along or will we see hits on their bottom line?
>> since 2000, price increases have been difficult and sometimes impossible for extended periods of time for companies to push through. starting in mid 2004 calendar, that began to change and as cost increases on the raw materials side and transportation side continue to rack up, we saw in q-3, q-4, companies begin to implement price increases and we’ve seen an acceleration of that recently. we think pricing power is coming back up, but unfortunately playing into the inflationary pressures the fed is watching.
>> investors’ perception of the economy’s strength has shifted. june lawrence tells us why after the break.
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Listen NYSE --- Deb (fast)
G.M. --- Tom (fast)
deborah kostroun is at new york stock exchange a half hour after the close or so with more on the action.
>> mike, taking a look at what we’re watching today and the past week, we are looking at this quarter and how things are going. companies in the s&p 500 for the second quarter expected to see profit growth of 7% to 8% on average this quarter. that has risen from january 1 when we were expecting 7.6%, according to thomson financial. the average quarterly growth over the past three decades is 7%. we will be getting alcoa, world’s biggest aluminum producer, the first company in the dow to announce their results when they report on april 6 for the first quarter. looking at the gainers in the s&p 500, what we did see, automakers, the best performers along with utility stocks, also consumer durables. utilities, very interest-rate-sensitive product. earlier this week, they saw a shake up because the fed did increase interest rates. homebuilders, midweek when the fed increased interest rates, we saw homebuilders lower but in today’s session, they performed very well because a report showing new home sales jumped by the most in four years, also prices climbed to a record in february as buyers racing to beat those rising mortgage rates. and looking at the laggards in the s&p 500, we saw insurance stocks at the bottom of the barrel with a.i.g. a.i.g., of course, they have been under heavy pressure over the past couple of weeks. commercial services and energy stocks―exxon-mobil leading the way lower in that last hour of trading, one of the reasons we saw the dow closing lower. take a look at great atlanta and pacific tea company, jumping on the day, owner of a&p supermarkets, lifted from equal weight to overweight. conagra said they would restate earnings for the past two years because of tax errors and per-share earnings fell to 31 cents in the third quarter from 38 cents a year ago because of higher costs for ingredients. estee lauder raised at smith barney, estee lauder higher but household products lower.
>> in the case of general motors, a common stock decline of over 12%.
>> it’s a great story, you don’t hear me talk too much about stocks, but g.m., some would say the economy, between g.m. and g.e., it’s half the economy. i recall when amazon got into trouble a number of years ago, the bond analysts led the charge. merrill lynch today with a 44-page phonebook out on general motors. this is brian zinser. what it talks about is a linkage of bond analysis and stockness analysis and paints a troubled picture for general motors. over 23 years, general motors with a three-year moving average, i did that because it’s the length of a car, i’m told. but three-year moving average, here’s before the boom and you can see we’ve come right back down and moving it forward, we’ve dropped through the trend line going back to well into the 1980’s, back to pricing of 1983. the dividend is in jeopardy, they say it’s a toss-up. two years out or so, you may see the dividend cut. what i love about the report is they link it to something we all hear about, market share. merrill lynch says a thing to watch with g.m. is if g.m. market share, as a pie of the industry, goes below 25%. they’re there right now and if they fall further, that puts the bonds in jeopardy and stock in jeopardy, as well.
>> you read the merrill report. what in there really stands out?
>> what stands out to me is the idea of scale. they are talking about, this has happened before, the line, they say, in some ways they say g.m. is no different than others before, but it’s the size here. gmac, the auto financing, linked with this giant company, something about the size captures merrill lynch’s eye and tells them this is something they will watch. they call it the g.m. story, like a movie.
>> a cash crunch there?
>> they see a cash crunch and it comes back to the market share. what i love about the report is you have bond guys not just looking at the bonds, but linking it to equity and they say it’s about operating performance at the car company, not just about the financing of cars and the financing propping up the automobiles. if the operating business of the auto company fades, that begins to topple the house of cards. it’s that market share of 25%.
>> as charlie wilson once said, what’s good for general motors is good for the country. but in this case?
>> very troubled and clearly something to watch. their scenario is not months, before―more like two years.
>> tom keene, thank you very much. the economy is improving. job growth improving. the housing market improving. but what about the consumer? we’ll look at the outlook for the consumer and consumer durebilities after this with joel havard.
