Buoyed more by hope than reality that the global credit crunch’s consequences are brightening, the DJ Industrials and FTSE 100 indices rose 566 and 191 to reach 12,891 and 6,091 respectively since our last report on April 11. This may, in part, be due to the latest US quarterly corporate earnings, which show that the non financial sector is holding up well. But earnings are historical statements and so lag behind current perceptions of future trends. Those perceptions, whether grounded in fact or fiction, are what drive consumers’ future spending patterns and they are gathering gloom both sides of the Atlantic, including the Euro zone countries.
Leading those gloomy thoughts, grounded in fact, is the declining housing sector which affects many production industries where new builds are concerned, and nowhere is this more highlighted than in Spain, whose housing-driven economy faces an abyss. Meanwhile, Britain’s mortgagees are struggling with much higher payments, despite the BoE’s attempts to coax lenders to ease market conditions for prospective and existing borrowers. The inevitable outcome will be soaring repossessions and personal bankruptcies this year and probably next, not only because of borrowers’ strapped finances but also rising unemployment as consumers retrench.
Signs of this are already emerging in what was once thought as reasonably recession proof, the drinks sector, as pub chains report declining profitability. If consumers will not change their gloomy outlook soon then a far greater implosion than the sub prime mortgage debacle will emerge. This will be the spectacular collapse of many large companies which have saddled themselves with high debt levels, often aided by private equity groups (asset strippers in new clothes) and so have no room to manoeuvre as their dwindling profits fail to cover their interest payments. It would not surprise this columnist if one of the earliest casualties was a leading British house builder.
Conditions in the public sector look little better as the Government’s finances worsen, the balance of payments deficit hit’s a record high and inflation prospects deteriorate, leaving it little leeway to fight off truculent public sector unions.
Our own list of stocks looked perky as rises outnumbered falls by two to one. Leading the risers was logistics software provider, Manhattan & Associates, up 19.4% since our last report. Closely behind was FKI, Britain’s leading handling equipment supplier, up 17.3% as news emerged that its suitor, Melrose Engineering, a private-equity style investor, had secured board approval for its £478m offer of cash and shares, worth 81.3p per share. FKI’s shares, however, closed at 87p (April 25) on rumours that a rival private equity house, Blackstone, would make a higher offer.
Truck leasing and logistics company, Ryder Systems, added 11.5% after its net profits rose 9% in the first quarter of 2008, citing strength in its fleet management solutions segment. First quarter net income was $56.1m or 96 cents a share and these results were ahead of Wall Street forecasts. Sales of $1.54 bn are also above expectations. Ryder said it expected to perform well in difficult industry conditions, which includes a slowing US economy and high fuel costs. It estimates that second quarter profits will be in the range of $1.10 to $1.20 and full year profits between $4.55 and $4.75.
There were good rises in the forklift sector with Caterpillar and Nacco Industries adding 10.7% and 8.3% respectively. Unfairly, perhaps, Jungheinrich failed to share in the sharp rises despite reporting record profits and sales in 2007 and a positive outlook for 2008. These show that in 2007 the company raised net profits by 22% to 82m Euro and for the first time net sales pierced the 2 bn Euro barrier, up from 1.78 bn Euro in 2006. The board proposes to raise the dividend from 0.48 cents to 0.52 cents a share.
Among the fallers, the only significant drop was pallet pool operator, Brambles, down 13.3% following fading bid interest.
Bill Redmond
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