Bed Bath & Beyond Deal Shows Right Kind of Risk Taking
NEW YORK (TheStreet) -- CEOs are keeping a tight hold on corporate purse strings and that's caused a recent M&A lull. For investors, it's a lull that should have them taking a look at the exceptions to the rule among risk-averse CEOs.
Bed Bath & Beyond
Markets were absorbed by JPMorgan's
In Friday trading Bed Bath & Beyond shares surged 5% to $71.91, near record highs on an upgrade and increasing optimism on the benefits of the deal, and the surge may have a wider relevance than just the impact to its shareholders.
An April poll of corporate executives by Ernst & Young showed interest in mergers falling significantly in the first quarter, with just 31% of C-suites interested in cutting large deals, the lowest appetite since early 2009 and down from over 50% in previous quarters. Sharply falling M&A volumes and advisory-based earnings reflect that caution. Yet at the same time, CEOs are sitting on piles of cash and pouring it into share buybacks and dividends.
The positive market reaction to Bed Bath & Beyond's acquisition shows the benefit of staying aggressive in a landscape of austerity, share buybacks and corporate split-ups. The deal also comes as some investors put their money behind M&A hungry companies and S&P forecasters say that 2012 stock market gains may need to come outside of falterning earnings -- the lynchpin of a recovery from March 2009 lows.
After successfully competing with the likes of Web-based competitor Amazon
"After three strong years of growth, partly driven by Linen's
Its shares have risen nearly 25% in 2012, adding to a 2011 gain and a tripling of shares since lows reached in late 2008. Cost Plus shares are up nearly 125% in the last 12 months, on recovering earnings and its acquisition.
In Wednesday's deal, Bed Bath & Beyond said it would use its cash to buy Cost Plus for $22 a share, in a deal that will give the company ownership of new private label brands and designs, and a business that has returned to profitability after successive loss-making years during the recession.
Bed bath & Beyond will also pick up a business that generates 68% of its sales from exclusively branded and sourced products, diversifying its merchandise, notes Balter of Credit Suisse. Meanwhile, Cost Plus's World Market foods selection may give Bed Bath & Beyond stores a feel akin to Williams Sonoma
Cost Plus World Market, which was launched in San Francisco's Fisherman's Wharf, has 259 retail outlets in the U.S. and has partnered with Bed Bath & Beyond on previous store-within-a-store concepts.
Deutsche Bank -- a prominent S&P bull and a savvy forecaster of corporate earnings -- recently said that investors should brace for slowing corporate earnings. It means that after a consistent hum of strong earnings since the recession, investors may have to look harder for growth.
"Having recovered from cyclically depressed levels, S&P 500 EPS
Meanwhile, Jeffrey Ubben, the head of activist fund ValueAct Capital laid out the case for why he's betting his investors' money on M&A and corporate spending, with the expectation that it will drive future revenue growth, something he expects to become increasingly rare in coming years.
Speaking in between investors who profited from recent divestitures by Barnes & Noble
"Most sectors should deliver mid-cycle normal EPS in 2012 with the exception of Energy and Financials. We expect Energy to significantly over earn in 2012 and its EPS to decline in 2013. We expect Financials to under earn in 2012," noted Bianco of Deutsche Bank last Friday.
For Deutsche Bank, the biggest bull during a flat year for the S&P, the comments are noteworthy because their 2011 blown call had little to do with a mis-forecast of corporate earnings, but instead, a misread of economic headwinds like U.S. political gridlock and the intensification of a European debt crisis midway through the year.
While S&P 500 earnings grew 15% to $97 per share in 2011, markets were flat because the earnings multiple that investors were willing to pay fell roughly 13% to 13 times earnings -- below Deutsche Bank's beginning of year forecast. Still, Deutsche Bank sees the S&P rising roughly 8% in 2012 to 1475, because today's multiple may already price in more than just a slowing to single digit earnings growth, it suggests fears of a drastic slowdown or even a decline.
To escape a slowdown, Deutsche Bank suggests:
ValueAct's Ubben also has Halliburton on a select list of companies that he believes will outperform in the years to come.
To see whether deal spending works in an age of austerity, though, investors may not need to leave the house: watch for earnings growth momentum at Bed Bath & Beyond.
-- Written by Antoine Gara in New York.
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