Practical Side to Luxury Business
So Uncle Sam wants to raise taxes on sales of jewelry, boats, liquor, gasoline and cigarettes. The automatic reflex on Wall Street ought to be, dump the companies that supply or rely on those goods.
Instead, look what happened Tuesday: Tiffany & Co., the retailer that epitomizes the kind of luxury goods that the government wants to tax most, saw its stock jump $1.375 to $33.25 after rising $2 on Monday. That’s an 11% rise in two days.
Seagram, one of the biggest names in liquor and wine, rose $1.625 on Tuesday to $76.75 after gaining $1.25 on Monday.
And Ford Motor and Chrysler, which stand to suffer if higher gasoline taxes push car buyers to choose lower-profit small cars, both managed to advance sharply Tuesday, while the broad market closed mixed. Ford gained $1 to $32.25; Chrysler rose 87.5 cents to $11.
It looks as if the stock market expects that A) the new taxes won’t fly or B) the impact on the target companies won’t be nearly as severe as earlier feared.
To be sure, most of the stocks involved already had been beaten down dramatically. Tiffany traded as high as $53.75 earlier this year. Seagram was as high as $94, and Chrysler was a $20 stock. So an upward bounce probably was overdue.
The analysts who still are brave enough to be touting some of these stocks say the planned tax hikes--part of the government’s deficit reduction plan--won’t be a major drag on sales of the target products. Buyers of luxury goods aren’t price sensitive, these analysts argue. Others, however, aren’t so sure, as they watch sales slide at high-priced restaurants and luxury car dealers nationwide.
Should Tiffany worry? If you’ve got the wherewithal to spend more than $5,000 a pop on some trinkets there, an additional 10% federal excise tax can’t matter much to you, says analyst Edward Johnson at Prescott, Ball & Turben in New York.
Besides, Tiffany has been growing fastest overseas, Johnson notes. Foreign sales accounted for 25% of Tiffany’s total sales last year. The company has announced plans for new stores in Taipei, Taiwan, and Toronto.
Johnson thinks Tiffany will earn $2.60 a share this year, up 22% from $2.13 last year. In 1991, he sees $3.15 a share. At $33.25 a share, the stock trades for 13 times this year’s estimated earnings. That’s a bargain, Johnson contends.
As for Seagram, analyst Roy Burry at Kidder, Peabody & Co. says the proposed 12% federal excise tax hike on a standard bottle of spirits isn’t very damaging. The increase works out to about a 2% to 3% price hike on a $14 bottle, he says. Again, how many people are going to forgo booze because of that kind of price rise? (The spirits industry fears any tax increase, of course, but that’s because liquor consumption has been falling for years anyway, mostly on health concerns.)
Burry, however, doesn’t see Seagram as a screaming buy, even at around nine times estimated earnings per share this year. “You’ve got to keep in mind that there’s a recession in front of us, and a lot of Seagram’s earnings come from Du Pont,” Burry notes. Seagram owns 24% of Du Pont.
Recession or no, the luxury stock bulls can point to one new piece of evidence that consumers aren’t giving up their most cherished non-necessities, despite economic worries and fear of Mideast war.
Carnival Cruise Lines, the cruise vacation giant, on Tuesday reported record revenue and earnings for the quarter ended Aug. 31. Earnings were 80 cents a share, up 27% from a year earlier. Revenue rose 19%.
What’s more, Carnival CEO Micky Arison said: “Based on advance booking patterns, we expect to have a strong fall, and I suspect the cruise industry as a whole may well achieve record growth in 1990.” Carnival stock rose $1 to $13.875.
Is the luxury business Wall Street’s bargain-basement bin right now? Maybe. But there is strong evidence that the consumer trend in the 1990s will be to save more and spend less. You may win big if you bet against that concept, but you also may lose big.
Is L.A. the Next N.Y.?If you buy the idea that we’re in a recession, and that it started in the Northeast, there’s good reason to believe that Southland-based over-the-counter stocks are headed for a much bigger decline in the months ahead.
Investors who own these mostly smaller stocks would argue that they’ve already suffered enough. But consider what’s been happening on the East Coast:
* A stock index of OTC companies based in the New York City metro area has plunged 36% so far this year, according to the National Assn. of Securities Dealers, which compiles five such city indexes.
* The index of OTC firms in the Washington area has lost 24.8% year-to-date.
In contrast, the Los Angeles OTC index is off 21.5%. The San Francisco index is down 19.5%. Both are down less than the average OTC stock nationwide, which is off 21.6%.
These indexes are very broad. The L.A. OTC index is composed of about 300 companies based in the region. So it’s a good gauge of activity.
Can we really expect to see prices of battered Los Angeles-area small stocks fall even more? After the severe hits to such Southland stocks as FileNet Corp., Teradata Corp. and Digital Sound Corp. in recent months--not to mention the carnage among S&Ls--some; investors probably figure that things can’t get much cheaper. But many experts say big investors and small investors alike still are inclined to sell at the slightest hint of bad news and neither group is ready to buy.
If you want to know where the bottom is, ask yourself, “How many more bad earnings reports are we going to see?,” says Will Porter, OTC trading chief at brokerage Cruttenden & Co. in Newport Beach. The answer, he says, probably is that the lousy earnings news is far from over. “We have to get that out of the way,” he says, before investors will have the confidence to step back into small stocks.
Playing OTC stocks is “like catching a falling knife,” says Steven Ledger, who runs an investment fund for Kayne, Anderson & Co. in Los Angeles. “Investors are scared to death right now of being too early” to buy back into downtrodden OTC issues.
Worse, Los Angeles is “still in the denial stage--that a recession can’t happen here,” Ledger says. That’s another strong hint that the worst news is yet to come.
So if New York and Washington are pointing the way for us, the damage is far from over. The selling surge may just have begun to accelerate in the third quarter: San Francisco-based Associated Capital Investors, which tracks its own index of 300 California stocks (big stocks as well as small), says its index tumbled 28% in the third quarter versus a 20% drop in the average stock in the Standard & Poor’s 500 index.
Briefly: One more reason not to feel good about the financial system: The Bond Investors Assn. reports that 17 companies defaulted on $3.6 billion worth of bonds in the third quarter. Though that was down from $4.2 billion in defaults a year earlier, the group sees defaults surging to $7 billion in the fourth quarter, for a full-year total of $23 billion versus $11.9 billion in 1989.
ROLLING BEAR MARKET?
Over-the-counter companies based in the L.A. area haven’t seen their stocks fall nearly as much, on average, as stocks of companies in two major Eastern metro areas. But the Eastern experience could be a harbinger for the West, some analysts fear.
Regional Index closing value Pct. stock index Year end ’89 Tues. change San Francisco 117.27 94.39 -19.5% Chicago 110.56 88.14 -20.3% Los Angeles 103.59 81.32 -21.5% Washington 132.13 99.35 -24.8% New York City 116.56 74.65 -36.0% OTC composite 454.82 356.39 -21.6%
Source: National Assn. of Securities Dealers
