This article first appeared in the St. Louis Beacon: November 19, 2008 - When St. Louis investors try to determine how Wall Street's woes have infected Main Street companies, they should keep flu shots in mind.
Just like flu shots inoculate people against a potentially debilitating -- and sometimes fatal -- disease, so can companies reduce the impact of Wall Street's infection with careful debt management, conservative investing and a strategy that guards against excessive risk.
However, even successfully vaccinated patients can suffer side effects. And don't forget that the Centers for Disease Control and Prevention said flu shots for the 2007-2008 season were only 44 percent effective because the vaccine didn't match all of the expected disease strains.
The current economic flu season contains strains on the economy that experts fear will last longer, strike deeper and hit in more unexpected ways than typical financial slumps.
"With the credit crunch, we're in a nuclear winter, which will last 12 to 24 months," says Michael J. Alderson, professor of finance at St. Louis University's John Cook School of Business. Alderson started his countdown in March.
Even companies that have taken preventive medicine are being affected by a climate that many financial diagnosticians say could be as bad as the Great Depression.
"You can have a conservatively managed company whose stock has been down 30 percent," says Keith Womer, dean of the college of business administration at the University of Missouri-St. Louis.
Cashing in, cashing out
Perhaps the best bet for an investor in a sagging economy is an all-cash buyout offer.
Shareholders of Anheuser-Busch will receive $70 a share from the recent InBev takeover, which is a lot better than the stock's price for the five years preceding InBev's offer. During that period, Anheuser-Busch's stock hovered between the low $40s and the mid-$50s, and it trailed the S&P-500 index.
The InBev deal was a rare opportunity; potential investors in other St. Louis companies will have to work harder. "There haven't been many good places to hide except for Treasuries and good corporate bonds," Womer says.
Experts interviewed by the St. Louis Beacon say companies best-equipped to deal with a prolonged, severe economic slump should have minimal debt, strong operating cash flow and no investments in exotic financial instruments.
Also, companies providing essential goods and services, such as food and medical care, should do relatively well versus the broader market. That's a low hurdle these days: The S&P 500-stock index is down 40 percent for the 12 months ended Nov. 14.
Judging from their stock performances, several of the region's largest companies exhibit some or all the qualities of an economic slump survivor. They include Ralcorp Holdings, a manufacturer and distributor of private-label foods, whose stock gained 18 percent for the 12 months ended Nov. 14; Laclede Group, which climbed 46 percent; and Panera Bread, which rose 5 percent.
Stifel Financial bucked the ebbing tide of financial services firms with a 16-percent gain on a split-adjusted basis, and Insituform Technologies, which maintains and replaces underground pipes, rose 6 percent.
Year-end worries
Although shares in St. Louis stocks are in the red over the past 12 months, recent results for the July-September quarter suggest that many have coped with -- or fended off -- early, dramatic symptoms of the Wall Street flu.
Certainly, most local companies are healthier than Wachovia, which, using our public-health analogy, ventured into cold economic weather without a hat, without a scarf and without a coat. (Long-term investors lost their shirts.)
However, investors should beware: Even though the economy was bad during the July-September quarter, it could get worse. "Right now, analysts' estimates for the fourth quarter are too optimistic, even though companies have reduced expectations," says Juli Niemann, executive vice president for the Clayton financial advisory firm Smith, Moore & Co.
Forecasters fear the most serious damage will occur when consumers stop buying; and that's why areas such as retail and banking bear watching in a bear market.
For retailers like department stores, the true test will come during the quarter that includes the Thanksgiving-Christmas-New Year's shopping season. There are early warnings of trouble, creating an omen not only for the sellers of retail goods but also for the makers of consumer products such as the St. Louis-based companies Furniture Brands and Brown Shoe.
On Monday, home-improvement giant Lowe's said its third-quarter profit dropped 24 percent from the year-ago period. Target said its third-quarter profit fell 24 percent. Last week, the Commerce Department said retail sales dropped 2.8 percent in October, the fourth consecutive monthly decline.
Furniture Brands, whose brands include Broyhill and Lane, got a head start with bad news. For the quarter ended Sept. 30, sales from continuing operations dropped to $413 million, down nearly 18 percent from the same period last year. It lost $41.7 million, or triple the loss for the year-ago quarter.
The stock is off 76 percent since mid-May. The company recently suspended its quarterly dividend and reduced fiscal-year sales and earnings forecasts.
"By nearly every measure, the economic environment in which Furniture Brands operates has worsened in the past three months," said Ralph P. Scozzafava, the chairman and CEO, when the results were released on Oct. 30. "Consumer confidence has been shaken by the unprecedented turmoil in the global financial markets.''
Brown Shoe doesn't officially report third-quarter results until Nov. 25; but last month it issued preliminary data that prompted two analysts to cut their ratings. From Oct. 7, the day before the announcement, until Nov. 14, the stock fell 42 percent.
Brown Shoe said third-quarter sales would be about 2 percent lower than those of the year-ago quarter. Third-quarter earnings, including one-time charges, could be one-third the amount for the same period last year.
Energizer Holdings -- whose products include batteries, razors and sunscreen -- told investors that the future looks uncertain even though its July-September profit beat Wall Street predictions.
"Despite our strong brands and stable organization, we nevertheless enter a very uncertain macro-economic environment in 2009," CEO Ward Klein said on Oct. 30.
The uncertainty is caused higher raw material costs and "increasingly stressed consumers throughout the world."
Energizer once forecast a 10-percent earnings per share growth for the 2009 fiscal year, which started six weeks ago. But a strengthening U.S. dollar, which weakens sales in overseas markets, "makes it unlikely" that Energizer will achieve its goal, the company said. "At existing currency rates, holding earnings flat will be a challenge."
Loan rangers
As big banks get blasted by the economy and by their lending and investing practices, some analysts say regional banks -- at least conservative ones -- may be best-equipped to absorb the financial punishment.
However, investors must read the fine print. "I've noticed that some banks which are not in good shape are touting performance of just one unit," says Juli Niemann, of Smith, Moore & Co. "Watch out when banks sound optimistic or slightly encouraging."
Jaime Peters, a Morningstar banking analyst, recently attended a banking conference where she found it "very disturbing" that "weaker players still seem to be fairly optimistic." The conference dealt with larger banks.
In a video interview posted on the independent research firm's website last week, Peters declared: "We're still in a deteriorating market."
Among publicly traded banks based in the St. Louis area and Missouri banks with a strong local presence, the theme is caution.
"The economic outlook for this industry projects to remain extremely challenging well in to 2009," said Thomas A. Daiber, president and CEO of Centrue Financial when he announced third quarter results on Oct. 29.
Some banks, including Centrue, are seeking federal bailout money. Some have raised loan loss provisions as a financial cushion for loans going sour, warning that they see some weakness in both residential and commercial real estate loans.
"Should the economic climate deteriorate from current levels, borrowers may experience difficulty, and the level of nonperforming loans, charge-offs and delinquencies could rise," Daiber said.
His loan loss provision was $1.23 million for the July-September quarter versus zero in the year-ago period. Daiber is "paying particular attention to borrowers with residential real estate exposure," adding that "virtually all of these relationships are performing."
Centrue's third-quarter earnings per share dropped to 46 cents versus 60 cents for the same period last year. Its stock fell 48 percent in the 12 months ended Nov. 14.
Enterprise Financial Services recently reminded investors that it didn't participate in subprime lending; didn't invest in securities secured by subprime loans; and didn't own common stock or preferred stock issued by the mangled mortgage companies Fannie Mae and Freddie Mac.
In a recent filing with the SEC, Enterprise said it is "well-capitalized under the regulatory guidelines," even during "unprecedented turmoil in the financial markets and the continued deterioration of the housing market."
Excluding a hefty one-time charge related to the performance of its insurance subsidiary, Enterprise's profit from its core banking business was about the same for the July-September quarter as for the same period last year.
The third-quarter loan loss provision rose to $2.8 million from $600,000 for the year-ago period. The stock is off 36 percent for the 12 months ended Nov. 14. Enterprise is seeking federal bailout funds.
The third quarter for Commerce Bancshares illustrates what happens not only when the economy dives but also when companies get involved in complex financial instruments.
Although net interest income rose by 12 percent to $151.6 million versus the same period last year, the loan loss provision more than doubled to $29.6 million. Commerce also took a pre-tax non-cash charge of $33 million to buy back auction-rate securities from its customers.
These securities have been marketed by banks and financial services firms as having better yields than money market funds plus easy accessibility.
However, these securities involve periodic auctions to reset their interest rates. As the economy declined, investors learned that their funds were frozen because sellers of these securities couldn't find enough buyers.
The bottom line: Commerce's third-quarter profit was $26.5 million compared to a $55.9 million profit for the year-ago period. However, the stock is up 2 percent for the 12 months ended Nov. 14. Commerce won't seek federal bailout funds.
Stock performances like those of Commerce and Stifel demonstrate how some companies, at least for now, have reduced the side effects of the Wall Street flu even in industries blitzed by the economy.
Financial advisers always exhort investors to do their homework on both individual companies and industry trends regardless of whether the market is up or down. "Don't try to call the turning point in the market," says UMSL's Womer.
SLU's Alderson adds that investors should follow the advice of Peter Lynch, the former Fidelity Magellan fund manager, and Warren Buffett, the chairman and CEO of Berkshire Hathaway. "Don't invest in something," he says, "unless you can describe it in one or two sentences."
Robert W. Steyer is a freelance business journalist in New York.