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Daily Catalysts Report - AIG, GM, SBUX, WSM

Posted on | November 11, 2008 Time: 3:05 am |

This post is about four stocks in the news today, each with a different tale of woe to tell.

On our left, we have insurance giant AIG, recently made the 80% property of the U.S. government, and an auto maker in GM that is seeking $75 billion from said government…just without the nationalization.

And on the retail side, we’ve got a once unsinkable growth ship in Starbucks, and a home retailer in Williams-Sonoma that, after already suffering through two years of horrible housing markets, is beginning to tear apart at the seams.

AIG - The big (though largely expected) news today is that a new bailout package has been put together totaling $150 billion, twice the amount of the original government loan. The outstanding loan balance has been reduced to $60 billion from $85, and the interest rate was drastically reduced from LIBOR + 8.5% to LIBOR + 3%. You know it’s bad when posting a $24 billion quarterly loss isn’t your biggest headline of the day.

General Motors (GM) - Shares traded down 22% today, reaching their lowest levels since…get this…1946. One analyst reportedly put a price target of $0 on the equity today, as GM continues to burn through billions in cash per month. Markets are concerned that the loans will only stem the bleeding temporarily, even if the money comes with tough standards for fuel efficiency and hybrid production (a likely outcome in a Democrat-controlled Congress and White House).

Allowing the auto makers to participate in bailout/rescue/TARP plans comes with many complex risks. What if the “right” way to fix the industry includes cutting 30% of the workforce? As it stands we’re only allowing GM, Ford, and Chrysler in because they support millions of American jobs. We’re seeing the creation of a terrible feedback loop, where the motivation to lend the money inspires decision makers at the auto companies to turn away from the glaring reality that current business models are not sustainable.

Starbucks (SBUX)

It wasn’t so long ago that I was reading quarterlies from Starbucks utterly slack-jawed at the store growth the coffee retailer was able to consistently pump out. They did so well during 2001-2002 that a lot of folks thought this company was recession-proof, that we would always buy our $4 frappallatechinos.

After officially breaking the growth trend earlier in the year and announcing the closing of 600 stores, Starbucks posted net income that was down 95% from a year ago on closing expenses and other restructuring efforts. Comps growth was negative 8% in the quarter, a sign of both economic weakness and a full frontal attack from McDonald’s (MCD) in many key markets.

While SBUX shares may seem appealing at their lowest levels since 2002, the P/E is still above the market average, and absent the organic growth that’s pretty hard to justify. I would have to see the company grow free cash flow by $500 million annually (with most coming from capex) before considering the stock a good investment.

Williams-Sonoma (WSM)

This stock in a better environment could be a real darling; Williams-Sonoma has great brands, staid management, and strong external sales channels via e-commerce and catalogs. But in our current environment, there are few worse places to be in retailing than home products. October comps were -27%, not only a horrible number but still accelerating following a 14% drop in August and 20% in September.

Earnings estimates for the full year have been slashed and still untrustworthy given the growing weakness in the consumer spending & housing, and the rapidly growing dividend yield may even be threatened. Unless there’s a massive wave of weddings in the next 90 days, Williams-Sonoma stands to lose out during its key fourth quarter and may break loan covenants.

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Category: Financials, Housing, Industrials, Retail
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