Tuesday 15 October 2019

The end is finally nigh for Wall Street's record bull market run

A trader works on the floor of the New York Stock Exchange as shares take a battering last week
A trader works on the floor of the New York Stock Exchange as shares take a battering last week
Richard Curran

Richard Curran

With billions wiped off the value of US stocks last Wednesday, and President Donald Trump calling the head of the US Federal Reserve "crazy" and making a "big mistake" on interest rates, investors had reason to be very nervous about a possible crash in stock markets.

The 3.3pc falls on Wall St last Wednesday were followed by falls in Asia and Europe. Last Thursday, news of lower than expected inflation in the US, could only temporarily hold back the sell-off. Despite, the following day's rebound many analysts fear more falls are yet to come

There are two basic reasons why investors are so jittery. Firstly, share prices have enjoyed a massive long-term bull run that would make anybody still invested nervous. Secondly, the S&P 500 did not record a single one-day move up or down of more than 1pc during the third quarter of 2018. And that has not happened since 1963.

So, Wednesday's sell-off came as a big shock. So are US stocks overpriced?

Warren Buffett has a measure referred to as the Buffett Indicator. He once described it as "the best single measure of where valuations stand at any given moment".

It's a guide where basically you divide the total market capitalisation of all US stocks by the latest gross domestic product (GDP). If the indicator falls below 80pc-90pc, it signals that stocks are cheap. Anything significantly higher than 100pc can indicate stocks are expensive.

The Buffett indicator peaked at about 145pc just before the dotcom bubble burst and reached nearly 110pc before the financial crisis. In July it hit 149pc. But, it was already at 130pc late last year and stocks have kept going.

Another indicator is the Cape Ratio (Cyclically Adjusted Price to Earnings) and it would have suggested that stocks were somewhat overvalued a year ago in the US.

All of this is against a backdrop of share buybacks which have also played their part in keeping American share prices high. The value of share buybacks peaked about two years ago but boards in 2018 are on track to approve a record level of $1trn worth of share buybacks for this year.

Not all approved buybacks go ahead but there have been so many tailwinds pushing up share values. Now headwinds are appearing.

The consensus seems to be that a combination of rising interest rates, tariffs and inflation, will conspire to bring the party to an end. The end has been nigh for a long time. This might finally be it.


Glanbia pays a chunky $350m for Slimfast business

'Thought-provoking' is how one analyst described Glanbia's $350m acquisition of dietary products business SlimFast. The deal marks a foray for Glanbia into a mass consumer brand that is very well known.

Unfortunately from the period 2000 to 2015 it wasn't necessarily very well known for the best reasons. It had been acquired by Unilever in 2000 for a massive $2.4bn, even though its sales were around $600m - a hefty price. Unilever planned to make it the centrepiece of its weight loss division but made a mess of it on practically every level. Sales collapsed by 70pc and it was eventually sold to private equity firm Kainos Capital for an undisclosed sum.

Since then Kainos have got just about everything right. They repositioned the brand and revitalised the product offering. Instead of just selling drinks to mums trying to shed some weight in a hurry, they developed the business in line with overall weight management trends on the back of a $50m marketing drive.

Men now account for at least 30pc of sales and it is trying to leverage its name recognition while also catching the latest healthy eating trends.

It isn't always easy to have a well-known brand that has been around for a long time. Consumers recognise the name but may have an out-of-date perception of what it is about.

For example, SlimFast is now moving towards overall dietary health and weight management, so it isn't just about slimming or even slimming fast. In one sense it is a perfect fit for Glanbia, given the Kilkenny firm's growing stable of nutritional brands and its large presence in the US.

SlimFast has been the fastest-growing brand in weight management in the US over the last three years. But the price still seems a little toppy. Sales may have collapsed for SlimFast from $600m to $180m between 2001 and 2014 but they have been growing under its private equity ownership to $212m.

According to Goodbody, based on its ebitda last year of $24m, the price equates to trailing EV/ebitda multiple of around 14.5 times. It is a major brand in an $8bn weight management market, but it is an incredibly competitive market. The sellers have done well, although speculation earlier this year was that it would be put on the market for around $400m.

Glanbia will expect to build further on the turnaround story through new product innovation and sales channels.

Glanbia is funding the deal through existing debt facilities and has headroom for more deals. So chief executive Siobhan Talbot isn't betting the bank on it by any means. It just may be hard to keep that momentum of recent years going.


Cheapest isn't always the best

What is the biggest challenge facing the Government in solving the housing crisis? Getting houses built quickly. So it is a little odd that no reference was made in the budget to a single measure to encourage, train or upskill people in the construction professions to meet this obvious need. No incentives. No new ideas.

After all, if the Government was to succeed in building all of the houses it is promising, how many more skilled tradespeople and professionals would be needed? A lot more than we currently have.

The Construction Industry Federation led off its Budget 2019 submission with the need to invest in people. Its next request to the government involved reforming how public procurement is conducted.

Builders are undercutting each other to win business and in some cases are promising delivery at prices that simply don't work. Seventy construction companies have gone bust since the beginning of the year, despite the rate of building, according to the CIF.

Tender prices have risen. Labour costs are set to rise even further. Yet according to CIF director general Tom Parlon, construction companies must avoid bidding too low to win major contracts.

The consequences can be painful for government and taxpayers. Kildare-based company MDY sought protection of the courts last month saying it was insolvent. It is currently involved in six projects, including the construction of social housing units and a primary care centre.

Its creditors include various subcontractors and Revenue. An interim examiner was appointed. But it is a problem that could keep happening as the State tries to ramp up construction at what appears to be the most competitive price. But cheapest isn't always best. There is more to the concept of value for money than the lowest bid price.

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