There are an extremely small number of companies which are likely to do relatively well during the recession, either because they are the market share leaders in their industries by a wide margin, or they are in businesses which sell products and services which are a necessary part of everyday life.
Wal-Mart (WMT) recently announced that its same store sales in January were up 2.1%, which was more than forecast. With the company’s huge network of stores and ability to strong arm suppliers, Wal-Mart offers shoppers good merchandise at prices which becomes more and more attractive as the downturn continues.
McDonald’s (MCD) says its same-store sales are holding up fairly well. Its “value meal” concept is likely to keep customers returning to its restaurants for plentiful and inexpensive food.
Colgate (CL) sales have also held up well as the recession has deepened. People are going to buy toothpaste and shampoo unless they are completely out of money.
Over the last year, shares of Colgate, Wal-Mart, and McDonald’s have significantly outperformed the DJIA.
The signals of a recovery will probably come from companies which are No. 2 or No.3 in their industries. It will be telling if they can begin to show even slightly improving trends operating in the shadow of larger competitors. The other area of corporate America worth watching is the sectors which have done substantially worse than most. That includes airlines, automobiles, and media companies.
Looking though a list of some of America’s largest companies to find firms which fit these descriptions, 24/7 Wall St. identified ten companies to watch for the signs of an economic recovery. A reasonable quarter or a slightly better-than-expected outlook from some of these companies should show that the recession is coming to a close.
Target (TGT) is the substantially smaller competitor to Wal-Mart. While Wal-Mart had an increase in its same store numbers last month, Target’s dropped 3.3%. The company still managed to have an extremely small increase in revenue to $4.14 billion. This chain remains an example for the better-run and stronger balance sheet retail operations in the US. It has more than 1,600 stores and 350,000 workers. Its revenue last year was $63 billion compared to Wal-Mart’s $378 billion. Wal-Mart takes so much of the store traffic of customers with modest incomes that it will take an economic recovery for Target to begin to see even modest sales improvement. Better numbers here mean retail is starting a slow recovery to health.
Starbucks (SBUX) is a reasonable proxy that demonstrates the ability of the middle class to do very modest discretionary spending. The coffee store chain has cut out enough locations and employees so that it no longer saturates the markets where it does business. If it has done this correctly, Starbucks stores will not be competing with one another for the same customers. With a fancy cup of coffee priced at $3 and breakfast at $5 or $6, people do not have to be wealthy to come back to Starbucks, especially with its new value meals But, they won’t if they feel, as many people do now, that they are close to being poor. If Starbucks sends a signal that its business is a bit better, this will mean that middle income consumers are feeling hopeful .
CBS (CBS) can still put shows on the air that attract more than 15 million viewers. It is hard for any medium other than broadcast television to be able to give marketers that kind of tonnage. In a recession, the fact CBS competes with Fox, ABC, NBC, and Univision means that the network is up against companies trying to take its market share and advertisers who are pressing for lower rates or have quit the TV advertising business completely. Unlike ABC or NBC, which are parts of companies in a number of other media businesses, CBS is a broadcasting “pure play.” Wall St. doesn’t like its lack of diversification and has pushed its shares down over 75% in the last year Once CBS’ advertising rates begin to recover, it will mean that marketers are prepared to spend to bring in new customers.
Ford (F) still insists it will not need government funds to get through a restructuring and return to profitability. Its 42% drop in North American vehicle sales for January make people wonder if Ford can pull this off. Among The Big Three, Ford has the best balance sheet. Because it is has not taken money from TARP, it is also probably viewed as “safer” by consumers who may worry about whether their warranties will be honored. Vehicle sales in the US were well over 16 million two years ago. This year they could fall below 10 million. When Ford’s forecasters say that they have seen a bottom it will be highly likely that the consumer is back in the car market. It may take years to get back to 2006 unit sales volumes, but with a much lower cost base Ford can be profitable with modest sales.
American Airlines (AMR) has been buffeted between high fuel costs in the summer and low passenger traffic since the holidays when the recession diminished air travel. AMR traffic for January dropped 11.7%. Even with cuts in capacity, AMR has fewer passengers per plane. Most executives in the industry say the drop in travelers has not bottomed. AMR will almost certainly cut more routes and more flights to its hubs. The airline does not need to stop losing passengers to signal a recovery. If the rate of the drop-off begins to slow significantly, travelers are heading back to the skies.
Dell (DELL) is viewed as the weakest of the US PC companies. Demand for computers has dropped as businesses and individuals keep PCs longer. Processors in machines bought two years ago are still good enough to perform most routine tasks. Dell is up against industry leader H-P (HPQ), which has an advantage in selling its products though retail outlets. Dell also competes with Apple (AAPL), which has a fiercely loyal customer base which has helped it gain market share over the last two years. Apple’s sales are not a good indication of how IT spending is moving. Mac sales can defy gravity if the force is not too great. If Dell begins to see an increase in demand, people are back in the market for modest-priced PCs, which is the largest part of the market.
Yahoo! (YHOO) is probably still the leader in display advertising revenue among US websites. It runs a distant second to Google (GOOG) in the much more profitable search ad business. Google may do fairly well through a bad economic patch because its system is considered to be the most efficient way to reach customers. The display advertising business has started to shrink as companies cut marketing budgets to preserve capital. Yahoo! has about 20% of the US search market to Google’s 66%. As the online ad industry begins to recover, Yahoo! will be able to tell shareholders that its search revenue has become more robust. If display advertising begins to recover a few months later, marketers across a number of sections of the economy will be returning cautiously back into the market. Advertising gets cut in a recession and put back into budgets as conditions recover.
E*Trade (ETFC) is the weakest member of the three big discount brokerage firms which includes Schwab (SCHW) and TDAmeritrade (AMTD). Commissions, fees, and service charges, indications of revenue health, all dropped in E*Trade’s fourth quarter. The company added over 76,000 new customers in the last three months of last year, but assets per customer dropped 23% to under $35,000 because of the falling market. When that asset per customer number begins to rise, even modestly, more investors will be starting to make money in the market or put more money into their accounts in the hope of catching a recovery in stocks.
Staples (SPLS) is where small businesses go to buy inexpensive office supplies. The US Census Bureau says there are just over 5.9 million “employer firms” in the US. About 3.8 million of those have fewer than 10 employees. When Staples reported its most recent quarter early in December, the company said “the worsening economy both in the U.S. and Europe have led both Staples’ business and retail customers to postpone purchases that are deemed not urgent..” With 2,000 stores worldwide, Staples is a near-perfect proxy for small business spending. The day the firm says it expects a rebound in sales and earnings is the day economists will believe that the millions of companies no one sees or talks about are contributing to improving GDP.
Electronic Arts (ERTS), the largest maker of video games, has fallen on hard times. Video game consoles and the games themselves were supposed to be “recession proof” because of their low cost and entertainment value. That theory has fallen apart as Sony (SNE) and Nintendo have reported that sales of products like Playstation and Wii are slowing down. EA recently laid off more than 1,000 people after missing quarterly sales targets. The firm ships games, including “Need for Speed Undercover” and “LITTLEST PET SHOP”, which sell millions of copies and make EA a very good barometer for consumer electronics spending. The company expects revenue for its fiscal year ending March 2010 to be flat with this year. When that figure starts to grow again, it will be a significant sign that consumer electronics discretionary spending is improving.
Douglas A. McIntyre