Fri, 30 Nov 2012
Morningstar markets editor Jeremy Glaser unpacks the week's M&A news and consumer data to see who's in a buying mood.
Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to The Friday Five.
Data and deals this week showed some real buying power in the market. Here to offer the details is Morningstar markets editor Jeremy Glaser. Jeremy thanks for being here.
Jeremy Glaser: Glad to be here, Jason. My buying power isn't quite as large as I'd hoped today after losing the Powerball, but there is always next time, right?
Stipp: What do have for The Friday Five, anyway?
Glaser: This week we are going to talk about Greece, about apartment REITs, ConAgra, Sandy hitting retail sales, and finally GDP.
Stipp: Greece will get the next tranche of aid following a debt deal this week. What were the details there?
Glaser: Well, we still haven't gotten all of the details yet. But it seems like the major outlines are that the three big players, the so-called Troika--the European Central Bank, the International Monetary Fund, and the European Union--are going to cut some of the interest rates on Greek bonds. They're going to extent the maturities, so that Greece doesn't have to pay back that money quite as quickly. And they are going to try some kind of private bondholder buyback to try to reduce the burden a little bit.
All this is an attempt to really get their debt to GDP ratio under control. If all of this stuff goes well, they'll get to about 124% of GDP, which is still pretty bad, but it's better than 140% that they currently are on a trajectory for. And I think this really just shows that Europe is very, very reluctant to take losses on Greek debt. Instead of saying that we're just going to accept that we're not going to get this paid back, and we're just going to write down some of the debt, they say, OK, just take a little bit longer to pay. They just keep extending the pain, and extending the pain, extending the pain, and this just isn't going to work over the long term.
We've talked a few times that at some point someone is really just going to have to take the loss, figure out where those losses are going to come. Even at 120%, that debt load just isn't sustainable for Greece. It's going to have to come down even farther than that.
Until we see a deal that really does that. It's not going to solve the problem in the long term. Certainly this deal, and the bailout money that comes with it, takes out some of that short-term and even some of the medium-term uncertainty.
Stipp: In REITs, Equity Residential and AvalonBay made a deal for Archstone. This deal has some interesting implications for the real estate market. What are those?
Glaser: This is certainly an interesting one. In 2007, at the really tippy top of the commercial real estate bubble, Lehman Brothers and a few other people, including Tishman Speyer, took Archstone, which is an apartment landlord, private. And now it's coming back out, as AvalonBay and Equity Residential are teaming up to spend about $16 billion including the debt to split the properties between them.
I think this is a big play on the future of the rental market. And it's saying that these landlords think there is going to be continued very high demand for rental housing, particularly in markets that they operate in--places like New York City or the Bay Area, where it's difficult to build new properties, where there is a high demand, rents are high, occupancies are high, and it's difficult to afford a new home.
I think they are expecting that lending standards are going to continue to be tight. The home ownership rate will never completely come back, and that they will really be able to make good on the quite a bit of money they are spending on this albeit very high-quality portfolio.
Philip J. Martin, who covers REITs for us, thinks that it's probably valuation neutral, that the amount of money that they're going to have to raise in order to buy it will probably offset the good cash flows that will come from the portfolio. But I think it will be interesting to see exactly how the rental market plays out as the housing market continues to grow. Are we going to see some of these renters go back [to home ownership], or are people going to feel more comfortable renting and continued to do that over the long-term?
Stipp: Another deal over in packaged foods: ConAgra bought Ralcorp. What does this mean for the shareholders of those packaged-goods firms?
Glaser: This was a bit of a surprise. It's a $5 billion deal; ConAgra is taking over Ralcorp, and this is on the heels of an offer they made about a year ago that was rebuffed by the Ralcorp board.
What this does for ConAgra, is it brings in a lot of private-label exposure. So, as consumers have traded down, they have been looking at private label. Ralcorp has a lot of penetration in places like Trader Joe's and Costco, where a lot more consumers are doing more shopping. ConAgra wants to add that to its stable. Right now they're known for some of their second- and third-tier brands, the branded side of things. And this really helps round them out a little bit.
Our analyst Erin Lash thinks that they are paying a pretty good price, but it certainly doesn't eliminate all of the challenges. There are rising commodity costs. The consumer is still operating in a somewhat challenging environment, even if they're looking at those private-label brands, they might be buying a little bit less. Does [the deal] get rid of those problems? No. But at the right price, this does look like a good way for ConAgra to gain some of that scale.
Stipp: And retailers, when looking at their buying power, some mixed news this week. Black Friday looked pretty good, but Sandy is also starting to hurt some of those retailers. What's your take on that?
Glaser: November retail same-store sales were released this week, and we don't get numbers from every retailer--notably, Wal-Mart doesn't report, and a few other places--but we do get an interesting sense of what's actually happening in the retail landscape. And that's exactly what we saw, that Sandy had a huge impact on the retail segment.
Macy's said that they had the best Thanksgiving weekend they've ever had, yet they still saw their same-store sales decline 1.7%, almost exclusively because no one bought anything during that period in the Northeast around when Superstorm Sandy was going to hit.
But Black Friday wasn't only good for Macy's. The National Retail Federation said they saw a 13% rise to almost $60 billion of sales, which really got the holiday shopping season off to a good start, and is a sign that retailers might be smiling come January.
Stipp: Lastly, we got GDP data this week. The consumer portion of that did come down a little bit in that revision, but consumers are still out there, and that number was still pretty strong.
Glaser: You're right that consumer data did come in a little bit weaker in the revision, but thanks to some inventories and import-export data, we went from 2% growth to 2.7% growth overall in that revision.
I think it shows that the recovery really is still on track. Even though 2.7% growth is nothing that you're going to throw a parade about, it's still a lot better than we're seeing in Europe. It's a lot better than we are seeing in many other parts of the world, and it just shows the United States economy is still showing some resilience in the face of some of those issues.
Bob Johnson, who follows this obviously very closely, is expecting 2% growth in the fourth quarter, a bit of comedown from where we are now, but not a huge drop in terms of any kind of recessionary problems that we could be facing. I think it shows that we're going to have to get use to below-trend growth. We're going to have to get used to this very slow, plodding recovery, but it's one that does seem to be really happening, that's very firmly entrenched now, and I think that's something that is generally a good sign for the U.S. economy.
Stipp: Jeremy, we always buy what you sell on the Friday Five. Thanks for joining me.
Glaser: Thanks, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.