Consumer-Focused Companies' Bonds Buck Drop by Their Stocks
13 February 2016 - 12:09PM
Dow Jones News
By Mike Cherney
The sharp drop this year in consumer-focused stocks is feeding
fears of a recession, but those companies' bonds are sending a more
upbeat signal.
Bonds from companies such as retailers and restaurants, which
are most closely tied to consumer-spending habits, have been strong
performers this year, contrary to what analysts would expect if the
economy were headed into a tailspin.
The disconnect is notable, because many investors view the bond
markets as a more sober indicator of corporate financial health and
economic conditions than stock markets.
Many bond investors expect low gasoline prices and the strong
job market to support consumer sentiment in coming months. Recent
data are bearing that out.
On Friday, the Commerce Department said consumers stepped up
spending on motor vehicles, groceries and building materials in
January. It also said spending rose in December after originally
saying it had fallen. A week earlier, the Labor Department said
wages increased 2.5% in January from a year earlier as employment
continued to rise.
Through Thursday, investment-grade bonds issued by companies
that depend on consumers' discretionary spending have returned
1.65% this year, a figure that reflects price gains and interest
payments. That compares with a total return of 0.74% for the
broader corporate-bond market, according to Barclays data, and a
roughly 12% decline in S&P 500 stocks from
consumer-discretionary firms, which also includes hotels and auto
makers.
Fundamentals for those companies are holding up, too.
Consumer-discretionary companies in the S&P 500 stock index are
still expected to post earnings growth of 8.4% for 2015's fourth
quarter, including those that have already reported, according to
FactSet data.
That is the third-biggest gain among the index's 10 sectors and
compares with a 3.7% decline in earnings for the index overall.
"The consumer-related sectors continue to outperform the broad
market, suggesting that there doesn't seem to be any meaningful
sign of panic that the consumer is ready to roll over," said George
Bory, head of credit strategy at Wells Fargo Securities.
Investors are snapping up new debt from consumer-focused
issuers. In January, brewery giant Anheuser-Busch InBev NV sold $46
billion in new bonds to fund its acquisition of SABMiller PLC, a
deal that ranked as the second-biggest corporate-bond sale on
record. The offering propelled U.S. investment-grade corporate-bond
sales to about $128 billion in January--the busiest start for any
year on record, according to Dealogic.
Some of the brewer's bonds have advanced since the Jan. 13 sale.
A 30-year bond has increased in price from about 100 cents on the
dollar to 107 in trading on Friday. The yield gap compared to
benchmark U.S. Treasurys has decreased from 2.05 percentage points
to about 1.9 percentage points, indicating the AB InBev bond has
outperformed the broader market.
"We think that oil prices will be a positive to consumer
spending," said Michael Kirkpatrick, who helps oversee the $560
million RidgeWorth Seix High Income Fund, which has been adding
bonds backed by suit retailer Men's Wearhouse, part of Tailored
Brands Inc.
The gains aren't uniform. Many traditional brick-and-mortar
retailers are struggling amid stiff competition from the Internet
as well as millennial shoppers who value experiences such as dining
out and travel more than they appreciate the old brand names.
And consumers remain cautious. The consumer-sentiment index from
the University of Michigan dropped to 90.7 in February's
preliminary reading, from 92 in January and 95.4 in February last
year. But Richard Curtin, the survey's chief economist, said that
"longer-term prospects for the national economy remained unchanged
at favorable levels."
Kent White, director of investment-grade research at Thrivent
Mutual Funds, is favoring bonds from General Motors Co. He said the
auto maker should have a strong year as oil prices stay low, though
sales may not break the record set in 2015. The company reported
earlier this month that its full-year 2015 profit more than
tripled, to a record $9.7 billion from $2.8 billion a year
earlier.
Mr. White called the company's bonds undervalued. A 2025 bond
traded recently at about 93 cents on the dollar, down from 95 cents
toward the end of last year, according to data from MarketAxess
Holdings Inc. But the 2% decline is far better than the company's
stock. It has lost nearly 20% of its value this year to trade at
$27.71 a share as of Friday's close, reflecting worries about a
future economic slowdown,
Still, consumer spending "appears to be, at least right now, the
strong part of our economy," Mr. White said. "It's definitely not
manufacturing, that's where the weakness is. The consumer is what's
propping us up."
Mr. White said he is also favoring debt from CVS Health Corp.
and Home Depot Inc.
Write to Mike Cherney at mike.cherney@wsj.com
(END) Dow Jones Newswires
February 12, 2016 19:54 ET (00:54 GMT)
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