Crisis? What Crisis?
Whenever potentially bad news hits the stock market, Wall Street always reacts the same way.
At first, professional investors scramble to unload stocks with even the slightest chance of being hurt.
And once they’ve purged these supposed offenders? Naturally, money managers reverse the process and begin scoping out U.S. companies that might actually benefit from the news.
That’s what’s going on today in reaction to the Asian financial crisis. After scurrying out of stocks with even remote ties to the region, Wall Street is now bent on figuring out which domestic companies might gain from the turmoil.
Some companies have extensive manufacturing operations in Southeast Asia but sell most of their products elsewhere. They’re likely to gain right away, as costs come down but demand for their goods remains constant.
Other companies won’t benefit immediately and might even face short-term problems. But they could pick up market share by building plants or gobbling up Asian competitors.
“We’ve read plenty of headlines about the problems in Asia,” said Michael Holland, head of Holland & Co., a New York investment firm. “The real issue is there are [companies] that will be winners in this. And, overall, the U.S. is a winner in this.”
But few other investors are so exuberant. They warn that companies are still vulnerable to problems ranging from softer demand for their products to the specter of price wars.
Angie Allen, chief executive of Globalt Inc., an Atlanta-based investment firm, doesn’t expect any stocks to surge as a result of Asia.
“We’re not talking stocks that are going to go up substantially,” she said. “We’re talking stocks that will do relatively well.”
The crisis has decimated currencies throughout the region. That means American companies have to shell out fewer dollars to buy Asian products, thereby boosting businesses that produce goods or buy components overseas.
But it’s also something of a double-edged sword. Because their products are cheaper abroad, many troubled Asian companies are expected to ramp up their exports and put pressure on profit margins of U.S. competitors.
Nowhere is that seesaw more in effect than in technology stocks. Investors laced into techs the last three months amid worries that Asian customers would cancel orders and dump low-priced components into the U.S. But some tech companies could be helped by that scenario.
Dell Computer (ticker symbol: DELL) announced Jan. 8 that it would cut prices on its top-selling PC line by about 15%. The computer maker said the strong U.S. dollar had chopped the prices of components it uses in its machines. Dell said those cuts exceeded its projections and that further price-slashing was possible.
Even better, Dell buys a large percentage of its components in Asia but has only minimal sales in the region, Holland said.
“They’re a clear winner,” he said.
Holland also is a fan of Motorola (MOT), which he says is “a potentially enormous beneficiary” of the Asian situation because the company buys a lot of cellular phone and semiconductor components in the region.
Asian fears sparked a sell-off that’s cut Motorola stock to $56.13 from almost $90 in July. The company missed earnings estimates when it released its fourth-quarter results last week. Nevertheless, Wall Street was reassured that Asia hadn’t done more damage.
Mark Keeling, a money manager at Jurika & Voyles in Oakland, likes EMC (EMC), which handles computer data storage for large companies. The company buys a lot of its equipment from Asia, he said, particularly so-called dynamic random access memory chips. (DRAMs are commodity chips that are mass-produced in Asia and have been swiftly declining in price.)
And EMC is unlikely to lose any sales, because its clients are mostly large U.S. companies.
DRAM “comes out of Korea and other [Asian] countries in spades, and those prices are going to go down,” Keeling said.
Banking giant Citicorp (CCI) could be helped in the long run, Holland said.
Along with other money-center banking companies, Citicorp shares have drifted lower recently due to concern that Asian borrowers will default on loans.
But Citicorp has an opportunity to acquire Asian financial institutions at cut-rate prices and wait for a turnaround in the region, Holland said. In late November, Citicorp said it would buy Thailand’s seventh-largest bank.
“Asia’s not going to go away, and managements that use this as an opportunity to invest smartly” will gain, Holland said.
Other big companies are taking advantage of weakened Asian currencies to build market share. Exxon (XON) is investing $400 million in a Thai petrochemical plant to develop plastics, and Lucent Technologies (LU) is teaming with a Singapore company to build a $1-billion plant to make chips for computers, wireless phones and communications equipment.
Several money managers say Mattel (MAT), the El Segundo-based toy company, could be helped as labor costs fall at its Asian manufacturing facilities.
“A lot of Barbies and Hot Wheels are made in the Far East,” said Bob Smith, manager of the T. Rowe Price Growth Stock Fund. “The labor component will drop because the currencies have dropped.”
The projected cost savings of Mattel’s Tyco Toys purchase “are coming through,” Smith said.
Mattel has brand-name products that are unlikely to be hurt by competition, Globalt’s Allen said.
“We’re really comfortable that Barbie isn’t going to be replaced by one of those cheap dolls,” she said.
John Wallace, manager of the Robertson Stephens Growth & Income Fund, favors cable companies, particularly US West Media Group (UMG) and NextLevel Systems (NLV).
Cable penetration is very low in Asia and is certain to be built up in coming years with the help of U.S. companies, he said. “Cable over there is in its infancy,” he said.
At the same time, investors have flocked to the U.S. cable sector lately, in part because it has virtually no exposure abroad.
Investors like cable for several reasons, he said. The 1996 re-regulation of the industry was lighter than some investors had feared. Burgeoning satellite systems siphoned fewer customers than initially thought. And low interest rates should help their debt-heavy balance sheets.
Wallace likes US West because it trades at a discount to the cable group, as well as a 30% to 40% discount to its own private market value. The company is part of US West Communications, the big Denver-based phone company, and trades as a so-called tracking stock. Investors don’t like that it’s still tied to the phone operation, Wallace said.
But the company is being spun off into a separate entity, which should help its stock price, and it has international cellular and cable properties, Wallace said.
“Once it trades on its own, the discount should shrink,” he said.
NextLevel was created by the 1997 split of giant General Instrument. Analysts expect its equipment to be in demand.
Whatever happens with cable growth in Asia, big U.S. cable companies “are going to be involved,” Wallace said.
Andy Pilara, head of research and portfolio management for the Robertson Stephens funds, likes paper companies. The sector has been hurt by concern that a glut of capacity in Asia will hurt makers of such commodity products.
But Pilara reasons that many Asian companies won’t be able to secure capital like they have in the past because of their fractured balance sheets and the economic reforms being put in place. Without access to cheap capital and subsidies from their governments, these companies won’t be able to build or expand plants.
That will cut into supplies down the line, potentially helping U.S. companies. He also thinks U.S. paper producers can buy out weakened Asian rivals. His favorite pick: Bowater (BOW), which he said is going to spin off its forest products business. The company earned 72 cents a share in the fourth quarter, far exceeding the 52 cents expected by analysts.
Marina Carlson, co-manager of the Strong Common Stock and Opportunity funds, favors several companies that buy a lot of another commodity, cotton, which fell in price 8% last year. (Reduced economic growth in Asia means weaker demand for such commodities.)
She likes Dyersburg (DBG), which makes fleece and knitwear; Fruit of the Loom (FTL); Russell (RML), the athletic-wear maker; Westpoint Stevens (WPSN); and Pillowtex (PTX).
“If cotton prices come down, they’re all going to benefit huge,” she said.
Carlson also thinks apparel manufacturers can gain in the short term. In that group, she likes Tommy Hilfiger (TOM), Liz Claiborne (LIZ), Nautica (NAUT) and Polo Ralph Lauren (RL). “Most of these guys source in Asia,” she said.
The danger with betting on these stocks, Carlson said, is that if even one company tries to grab market share by lowering prices, the gains of the whole group could be wiped out.
“The only risk is turning around and giving it to the consumer,” she said.
Carlson also thinks department stores will benefit for the same reason. Her picks: May Department Stores (MAY) and Federated Department Stores (FD).
“The management at May said: ‘We’re already negotiating. We’re getting a break,’ ” because of cheaper overseas manufacturing costs for the wholesalers from whom May buys goods.
Globalt’s Allen thinks big advertising companies such as Interpublic Group (IPG), which owns McCann-Erickson and operates in about 110 countries, and Omnicom Group (OMC), which owns DDB Needham and BBDO Worldwide, should also fare well.
They cater to large companies with brand names and substantial advertising budgets that are trying to muscle into Asian markets by buying up small local companies. So their business could be helped as those companies try to establish names for themselves through advertising.
They’re relatively safe because they’re well-diversified, Allen said. And because they don’t turn out material goods that rivals can undercut with inexpensive exports, advertisers don’t have to worry about troubled Asian manufacturers dumping cheap products.
“If you figure the [Asian] mom-and-pops were not advertising anyway and the multinationals pick up the mom-and-pops’ share, that bodes well for advertisers,” said Catherine May, a Globalt senior analyst.
Allen also likes Avon Products (AVP). Though it would seem that a cosmetics company would lose sales in a weak economy, past experiences in troubled markets show that women will keep buying makeup, Allen said. Also, the direct selling by Avon’s saleswomen helps because they can coax reluctant customers to buy. Though sales are off a bit, Avon is still experiencing 20% to 30% sales growth in local currency terms in Asia, May said.
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Street Strategies explores investment tactics. Times staff writer Walter Hamilton may use strategies he writes about in his personal account. He can be reached at walter.hamilton@latimes.
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The Asian Silver Lining?
Though most news out of Southeast Asia has been bad, investment pros say some companies could benefit from falling raw material costs or troubles afflicting overseas rivals. Analysts named the companies below as examples. They are ranked according to their return on average equity over the last four quarters, a measure of how effectively they’ve used the money invested by stockholders.
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Ticker Friday Proj. EPS growth Company symbol close P/E* rate** Avon Products AVP $57.56 23 15.2% Dell Computer DELL 92.75 40 29.1 EMC EMC 29.50 30 27.0 Omnicom Group OMC 39.38 31 15.2 Interpublic Group IPG 48.63 27 14.8 Polo Ralph Lauren RL 25.06 NM 17.3 Tommy Hilfiger TOM 40.31 16 21.6 May Dept. Stores MAY 51.81 17 11.5 Exxon XON 60.81 18 7.3 Citicorp CCI 119.88 17 11.7 Liz Claiborne LIZ 40.00 16 15.5 Pillowtex PTX 33.00 21 15.0 Lucent Technologies LU 75.44 88 20.9 Dyersburg DBG 11.19 11 12.0 Mattel MAT 39.38 57 15.0 Russell RML 24.56 13 11.3 Federated Dept. Stores FD 43.06 19 14.4 Motorola MOT 56.13 29 22.1 Fruit of the Loom FTL 24.06 38 16.0 Bowater BOW 45.69 36 7.0 NextLevel Systems NLV 18.56 NM 23.8 US West Media Group UMG 29.88 NM 16.3 Westpoint Stevens WPSN 44.75 21 14.8
1-yr. return on Company avg. equity Avon Products 157.1% Dell Computer 87.5 EMC 27.5 Omnicom Group 26.1 Interpublic Group 25.9 Polo Ralph Lauren 25.1 Tommy Hilfiger 25.0 May Dept. Stores 20.9 Exxon 19.6 Citicorp 17.8 Liz Claiborne 17.6 Pillowtex 16.4 Lucent Technologies 15.9 Dyersburg 14.2 Mattel 11.7 Russell 10.8 Federated Dept. Stores 10.4 Motorola 9.0 Fruit of the Loom 5.0 Bowater 3.6 NextLevel Systems --0.3 US West Media Group --6.9 Westpoint Stevens NM
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NM: Not meaningful
* Price-to-earnings ratio on trailing four quarters’ earnings per share, excluding extraordinary items. P/E from Bloomberg News based on Friday price. Note that P/E ratios can vary by definition and source.
** Projected annual earnings growth rate over the next three to five years.
Sources: Bloomberg News, Market Guide; earnings estimate data from First Call.
