Inflation is soaring, reaching 8.2% over the 12 months to June with price rises led by energy and fuel, materials and foodstuffs. An already increasingly problematic inflation trend was magnified by Russia’s invasion of Ukraine earlier this year and the continuing war is disrupting oil and especially gas supplies as well as those of the wheat and other grain crops both countries are major global exporters of.
Interest rates are also rising with central banks including the Bank of England and the Federal Reserve making steady hikes this year in an effort to bring inflation, which is tipped to hit 11%, under control. The combination of a quickly rising cost of living and the cost of borrowing starting to return to historic norms after more than a decade at and around record low levels means a period of recession is now considered more likely than the chances of avoiding one.
It all adds up to consumers having less expendable income than they have had for years and the situation is expected to deteriorate with inflation expected to remain at elevated levels deep into 2023 if not longer. Analyst consensus is that higher levels of household savings built up during the Covid-19 pandemic have helped cushion the blow of runaway inflation so far.
But as savings dwindle belts are starting to tighten. Economic data over the past few months shows UK retail spending is contracting, by 0.8% in May and 0.1% in June. June’s figure was boosted by a 3.1% rise in food sales with groceries companies putting the strong month down to shopping for the Queen’s Jubilee celebrations.
Groceries shopping is not, however, escaping the cost of living crisis entirely with evidence suggesting consumers are limiting their shopping baskets with luxury items taking the greatest hit. In May, food sales volumes were down 1.6% on the year earlier and 2.4% below pre-pandemic levels.
Source: The Guardian
But while shoppers might go for a slightly cheaper bottle of wine for Friday night or choose less expensive olives from the deli, basic food staples are one thing that tends to hold up best during a recession or when consumer sentiment turns negative. Which is why investors looking to tweak portfolios often turn to consumer goods companies when the going gets rough.
The biggest consumer goods companies focus their brand stables on mass market products which means the food and household staples they sell tend to be budget-friendly. Even their more premium brands are typically sold at a price point that makes them accessible to the average household.
Here we’ll look at the investment credentials of two of the world’s biggest consumer goods companies, Nestlé and Unilever, as well as McDonald’s, the world’s biggest fast-food company most famous for its cheap and tasty burgers.
These three companies are never going to offer the kind of returns that get investors excited but that’s not necessarily a bad thing. They have all offered investors solid returns and growing dividends over their recent histories and should hold up better than most stocks that rely on discretionary consumer spending over the period ahead. And longer term, these are the kind of reliable, income-earning stocks that can act as cornerstones for a diversified equities portfolio.
Let’s look at each in some more detail.
Unilever is the biggest London-listed consumer goods group and one of the world’s biggest. Its stable of brands includes sweet summer treats like Magnum ice creams and Solero fruit sorbets, sales of which will have been boosted by the recent heatwave. It also sells Hellman’s mayonnaise, Knorr stock cubes and household essentials like the Dove soap brand and Domestos among over 400 brands, 13 of which brought in more than $1 billion in sales each in 2021.
This week the Unilever share price rose 2.5% in Tuesday morning trading after it published a quarterly earnings report that pleased investors. As did the company raising sales forecast thanks to increasing the prices of its products to offset higher costs. Across its brands, Unilever said prices were up 9.8% over the first half of 2022 compared to the same period a year earlier. Second quarter prices were up 11.2%, keeping them ahead of inflation.
The price hikes saw revenues rise by 8.1% over the half despite volumes dropping 1.6% and Unilever told investors it expects growth to beat its previous forecast for between 4.5% and 6.5%. It didn’t put an exact figure on what it now expects growth to be but did say it expects it to be “driven by price”.
But what is Unilever’s long-term outlook? The company has been criticised in recent months by major investors including Terry Smith and Nick Train, two of the UK’s most successful fund managers. Smith accused the company of “trying too hard to display its sustainability credentials instead of focussing on running the business” and improving shareholder returns.
Some analysts believe the company has also grown too big and managing over 4000 brands makes it slow to react and less entrepreneurial than smaller rivals. But the negatives also suggest room for improvement which could make the current £100.42 billion valuation attractive and offer potential upside. A dividend return of 3.64% at the current share price is also not to be sniffed at.
Analyst price targets indicate a belief that the Unilever share price is seen as likely to make gains over the next twelve months with the 23 analysts polled by the Wall Street Journal setting an average target of £50.30 compared to the current £39.72. 11 of the analysts rate the stock as a hold with 7 rating it a buy, 2 overweight and just 3 a sell.
It’s not a stock that will get anyone salivating but looks a solid near-term option under current economic conditions, has reasonable potential upside, offers a good dividend and should provide reliable returns longer term.
Switzerland’s Nestlé is the world’s biggest consumer goods company, worth CHF322.41 billion (£277.93 billion) and sells brands including Nescafe, Nespresso, Häagen-Dazs ice cream, Cheerios, Maggi, KitKat and Smarties. The company currently offers a dividend yield of 2.39% and a gross profit margin of 48% provides a return on investment of 9.4% and grounds for optimism dividends might continue to rise by their five-year average of 4% a year.
This week Nestle followed the positive trend of strong results for consumer goods groups when it revealed that steep price increases to offset rising input costs had bolstered sales during its second quarter. The Kit Kat maker said it had managed to maintain a 17% margin and it was yet to see any big fall in demand from rising prices. It raised its full year sales growth forecast to 7-8%.
Of 25 analyts setting price targets for Nestle polled by the WSJ, 12 rate the stock a buy at its current valuation and another 3 as overweight with 8 recommending it as a hold. Only 1 analysts each has Nestle as underweight and a sell. The average 12 month price target for the company is CHF131.79 compared to the current share price of CHF122.25. That has to represent solid potential upside in the context of current market conditions.
The world’s biggest fast food brand may have just raised the price of a cheeseburger for the first time in 14 years but it still offers the cheapest prices for a quick bite to eat on the high street. And while it may take some flack for the nutritional quality of the meals it offers, and some wouldn’t be seen dead in one of its restaurants, McDonald’s benefits from enduring popularity. That’s unlikely to change anytime soon, especially during a cost-of-living crisis hitting lower-income households hardest.
McDonald’s shares also yield 2.2% in dividends and the company has increased shareholders’ income every year, without fail, since 1976. When the company reported fiscal 2022 second-quarter earnings on July 26 it showed comparable store sales, which exclude the impact of store openings and closings, jumped by 9.7%.
A negative has been the divestiture of McDonald’s Russian business which represented 2% of systemwide sales, 7% of revenue, and 2% of operating income. The positive is that rising prices don’t seem to be putting off customers, likely because rivals have made larger hikes. Trading at a price-to-earnings ratio of 27, McDonald’s shares are also reasonably priced.
That’s reflected in 20 of the 34 analysts polled by the Wall Street Journal rating McDonald’s as a buy, 4 as overweight and 10 a hold with none rating it as underweight or a sell. The average analyst price target for the stock is $281.29 compared to the current level of $258.89.
Every portfolio needs its reliable, steady cornerstones but these stocks are particularly important during periods we are currently experiencing. But all three of the stocks covered also represent solid potential for upside and dividend income.
EY Eyes Comeback for Biopharma M&A
EY noted that the total value of biopharma M&A in 2022 was $88 billion, down 15% from $104 billion in 2021. The $88 billion accounted for most of the…
A recent trickle of mergers and acquisitions (M&A) announcements in the billion-dollar-and-up range suggests that biopharma may be ready to resume dealmaking this year—although the value and number of deals isn’t expected to return to the highs seen just before the pandemic.
2022 ended with a handful of 10- and 11-figure M&A deals, led by Amgen’s $27.8 billion buyout of Horizon Therapeutics, announced December 13. The dealmaking continued into January with three buyouts announced on the first day of the recent J.P. Morgan Healthcare Conference: AstraZeneca agreed to acquire CinCor Pharma for up to $1.8 billion, while Chiesi Farmaceutici agreed to shell out up to $1.48 billion cash for Amryt, and Ipsen Group said it will purchase Albireo Pharma for $952 million-plus.
EY—the professional services firm originally known as Ernst & Young—recently noted that the total value of biopharma M&A in 2022 was $88 billion, down 15% from $104 billion in 2021 [See Chart]. The $88 billion accounted for most of the $135 billion in 124 deals in the life sciences. That $135 billion figure is less than half the record-high $313 billion recorded in 2019, including $261 billion in 70 biopharma deals.
The number of biopharma deals fell 17% to 75 deals from 90. EY’s numbers include only deals greater than $100 million. The other 49 deals totaling $47 million consisted of transactions in “medtech,” which includes diagnostics developers and companies specializing in “virtual health” such as telemedicine.
“We expect this to be a more active year as the sentiment starts to normalize a little bit,” Subin Baral, EY Global Life Sciences Deals Leader, told GEN Edge.
Baral is not alone in foreseeing a comeback for biopharma M&A.
John Newman, PhD, an analyst with Canaccord Genuity, predicted last week in a research note that biopharma companies will pursue a growing number of smaller cash deals in the range of $1 billion to $10 billion this year. He said rising interest rates are discouraging companies from taking on larger blockbuster deals that require buyers to take on larger sums of debt.
“We look for narrowing credit spreads and lower interest rates to encourage larger M&A ($50 billion and more) deals. We do not anticipate many $50B+ deals that could move the XBI +5%,” Newman said. (XBI is the SPDR S&P Biotech Electronic Transfer Fund, one of several large ETFs whose fluctuations reflect investor enthusiasm for biopharma stock.)
Newman added: “We continue to expect a biotech swell in 2023 that may become an M&A wave if credit conditions improve.”
Foreseeing larger deals than Newman and Canaccord Genuity is PwC, which in a commentary this month predicted: “Biotech deals in the $5–15 billion range will be prevalent and will require a different set of strategies and market-leading capabilities across the M&A cycle.”
Those capabilities include leadership within a specific therapeutic category, for which companies will have to buy and sell assets: “Prepared management teams that divest businesses that are subscale while doubling down on areas where leadership position and the right to win is tangible, may be positioned to deliver superior returns,” Glenn Hunzinger, PwC’s U.S. Pharma & Life Science Leader, and colleagues asserted.
The Right deals
Rising interest and narrowing credit partially explain the drop-off in deals during 2022, EY’s Baral said. Another reason was sellers adjusting to the drop in deal valuations that resulted from the decline of the markets which started late in 2021.
“It took a little bit longer to realize the reality of the market conditions on the seller side. But on the buyer side, the deals that they were looking at were not just simply a valuation issue. They were looking at the quality of the assets. And you can see that the quality deals—the right deals, as we call them—are still getting done,” Baral said.
The right deals, according to Baral, are those in which buyers have found takeover targets with a strong, credible management team, solid clinical data, and a clear therapeutic focus.
“Rare disease and oncology assets are still dominating the deal making, particularly oncology because your addressable market continues to grow,” Baral said. “Unfortunately, what that means is the patient population is growing too, so there’s this increased unmet need for that portfolio of assets.”
Several of 2022’s largest M&A deals fit into that “right” category, Baral said—including Amgen-Horizon, Pfizer’s $11.6-billion purchase of Biohaven Pharmaceuticals and the $6.7-billion purchase of Arena Pharmaceuticals (completed in March 2022); and Bristol-Myers Squibb’s $4.1-billion buyout of Turning Point Therapeutics.
“Quality companies are still getting funded one way or the other. So, while the valuation dropped, people were all expecting a flurry of deals because they are still companies with a shorter runway of cash that will be running to do deals. But that really didn’t happen from a buyer perspective,” Baral said. “The market moved a little bit from what was a seller’s market for a long time, to what we would like to think of as the pendulum swinging towards a buyers’ market.”
Most biopharma M&A deals, he said, will be “bolt-on” acquisitions in which a buyer aims to fill a gap in its clinical pipeline or portfolio of marketed drugs through purchases that account for less than 25% of a buyer’s market capitalization.
Baral noted that a growing number of biopharma buyers are acquiring companies with which they have partnered for several years on drug discovery and/or development collaborations. Pfizer acquired BioHaven six months after agreeing to pay the company up to $1.24 billion to commercialize rimegepant outside the U.S., where the migraine drug is marketed as Nurtec® ODT.
“There were already some kind of relationships there before these deals actually happened. But that also gives an indication that there are some insights to these targets ahead of time for these companies to feel increasingly comfortable, and pay the valuation that they’re paying for them,” Baral said.
$1.4 Trillion available
Baral sees several reasons for increased M&A activity in 2023. First, the 25 biopharma giants analyzed by EY had $1.427 trillion available as of November 30, 2022, for M&A in “firepower”—which EY defines as a company’s capacity to carry out M&A deals based on the strength of its balance sheet, specifically the amount of capital available for M&A deals from sources that include cash and equivalents, existing debt, and market cap.
That firepower is up 11% from 2021, and surpasses the previous record of $1.22 trillion in 2014, the first year that EY measured the available M&A capital of large biopharmas.
Unlike recent years, Baral said, biopharma giants are more likely to deploy that capital on M&A this year to close the “growth gap” expected to occur over the next five years as numerous blockbuster drugs lose patent exclusivity and face new competition from lower-cost generic drugs and biosimilars.
“There is not enough R&D in their pipeline to replenish a lot of their revenue. And this growth gap is coming between 2024 and 2026. So, they don’t have a long runway to watch and stay on the sidelines,” Baral said.
This explains buyers’ interest in replenishing pipelines with new and innovative treatments from smaller biopharmas, he continued. Many smaller biopharmas are open to being acquired because declining valuations and limited cash runways have increased investor pressure on them to exit via M&A. The decline of the capital markets has touched off dramatic slowdowns in two avenues through which biopharmas have gone public in recent years—initial public offerings (IPOs) and special purpose acquisition companies (SPACs).
EY recorded just 17 IPOs being priced in the U.S. and Europe, down 89% from 158 a year earlier. The largest IPO of 2022 was Prime Medicine’s initial offering, which raised $180.3 million in net proceeds for the developer of a “search and replace” gene editing platform.
Another 12 biopharmas agreed to SPAC mergers with blank-check companies, according to EY, with the largest announced transaction (yet to close at deadline) being the planned $899 million merger of cancer drug developer Apollomics with Maxpro Capital Acquisition.
“For the smaller players, the target biotech companies, their alternate source of access to capital pathways such as IPOs and SPACs is shutting down on them. So how would the biotech companies continue to fund themselves? Those with quality assets are still getting funded through venture capital or other forms of capital,” Baral said. “But in general, there is not a lot of appetite for the biotech that is taking that risk.
Figures from EY show a 37% year-to-year decline in the total value of U.S. and European VC deals, to $16.88 billion in 2022 from $26.62 billion in 2021. Late-stage financing rounds accounted for just 31% of last year’s VC deals, down from 34% in 2021 and 58% in 2012. The number of VC deals in the U.S. and Europe fell 18%, to 761 last year from 930 in 2021.
The decline in VC financing helps explain why many smaller biopharmas are operating with cash “runways” of less than 12 months. “Depending on the robustness of their data, their therapeutic area, and their management, there will be a natural attrition. Some of these companies will just have to wind down,” Baral added.
Baral also acknowledged some headwinds that are likely to dampen the pace of M&A activity. In addition to rising interest rates and inflation increasing the cost of capital, valuations remain high for the most sought-after drugs, platforms, and other assets—a result of growing and continuing innovation.
Another headwind is growing regulatory scrutiny of the largest deals. Illumina’s $8 billion purchase of cancer blood test developer Grail has faced more than two years of challenges from the U.S. Federal Trade Commission and especially the European Commission—while Congress acted last year to begin curbing the price of prescription drugs and insulin through the “Inflation Reduction Act.”
Those headwinds may prompt many companies to place greater strategic priority on collaborations and partnerships instead of M&A, Baral predicted, since they offer buyers early access to newer technologies before deciding whether to invest more capital through a merger or acquisition.
“Early-stage collaboration, early minority-stake investment becomes increasingly important, and it has been a cornerstone for early access to these technologies for the industry for a long, long time, and that is not changing any time soon,” Baral said. “On the other hand, even on the therapeutic area side, early-stage development is still expensive to do in-house for the large biopharma companies because of their cost structure.
“So, it is efficient cost-wise and speed-wise to buy these assets when they reach a certain point, which is probably at Phase II onward, and then you can pull the trigger on acquisitions if needed,” he added.congress pandemic genetic interest rates european europe
IMF Upgrades Global Growth Forecast As Inflation Cools
IMF Upgrades Global Growth Forecast As Inflation Cools
The International Monetary Fund published its latest World Economic Outlook on Monday,…
The International Monetary Fund published its latest World Economic Outlook on Monday, painting a slightly less gloomy picture than three and a half months ago, as inflation appears to have peaked in 2022, consumer spending remains robust and the energy crisis following Russia’s invasion of Ukraine has been less severe than initially feared.
However, the IMF predicts the slowdown to be less pronounced than previously anticipated.
Global growth is now expected to fall from 3.4 percent in 2022 to 2.9 percent this year, before rebounding to 3.1 percent in 2024.
The 2023 growth projection is up from an October estimate of 2.7 percent, as the IMF sees far fewer countries facing recession this year and does no longer anticipates a global downturn.
You will find more infographics at Statista
One of the reasons behind the cautiously optimistic outlook is the latest downward trend in inflation, which suggests that inflation may have peaked in 2022.
The IMF predicts global inflation to cool to 6.6 percent in 2023 and 4.3 percent in 2024, which is still above pre-pandemic levels of about 3.5 percent, but significantly lower than the 8.8 percent observed in 2022.
“Economic growth proved surprisingly resilient in the third quarter of last year, with strong labor markets, robust household consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe,” Pierre-Olivier Gourinchas, the IMF’s chief economist, wrote in a blog post released along with the report.
“Inflation, too, showed improvement, with overall measures now decreasing in most countries—even if core inflation, which excludes more volatile energy and food prices, has yet to peak in many countries.”
The risks to the latest outlook remain tilted to the downside, the IMF notes, as the war in Ukraine could further escalate, inflation continues to require tight monetary policies and China’s recovery from Covid-19 disruptions remains fragile. On the plus side, strong labor markets and solid wage growth could bolster consumer demand, while easing supply chain disruptions could help cool inflation and limit the need for more monetary tightening.
In conclusion, Gourinchas calls for multilateral cooperation to counter “the forces of geoeconomic fragmentation”.
“This time around, the global economic outlook hasn’t worsened,” he writes. “That’s good news, but not enough. The road back to a full recovery, with sustainable growth, stable prices, and progress for all, is only starting.”
However, just because the 'trend' has shifted doesn't mean it's mission accomplished...
That looks an awful lot like Central Bankers' nemesis remains - global stagflation curb stomps the dovish hopes.
Nike Escalates Design Battle Against Lululemon
The sportswear giant is accusing lululemon of patent infringement.
The sportswear giant is accusing lululemon of patent infringement.
The Gucci loafers. The Burberry (BBRYF) trench coat. When it comes to fashion, having a unique design is everything. This is why brands spend millions both creating and protecting their signature looks and the reason, as in the case of Adidas (ADDDF) , extricating a brand's design from creators who behave badly is a costly and difficult process.
There is also the constant effort to release new styles without infringing on another group's style. This week, sportswear giant Nike (NKE) - Get Free Report filed a lawsuit accusing lululemon (LULU) - Get Free Report of infringing on its patents in the shoe line that the Vancouver-based activewear company launched last spring.
After years of selling exclusively clothing, accessories and the odd yoga mat, lululemon expanded into the world of footwear with a running shoe it dubbed Blissfeel last March. These were soon followed by training shoe and pool slide styles known as Chargefeel, Strongfeel -- all three of the designs (including a Chargefeel Low and a Chargefeel Mid design) have been mentioned in the lawsuit as causing "economic harm and irreparable injury" to Nike.
Nike's History Of Suing Lululemon Over Design
The specific issue lies in the technology used to build the shoes. According to the lawsuit filed in Manhattan federal court, certain knitted elements, webbing and tubular structures are too similar to ones that had been used by Nike earlier.
Nike is keeping the amount it hopes to receive from lululemon under wraps but is insisting the company infringed on its patent when releasing a shoe line too similar to its own. Lululemon had previously talked about how its shoe line "far exceeded" its leaders' expectations both in terms of sales and ability to expand.
In a Q1 earnings call, chief executive Calvin McDonald said that the line "definitely had a lot more demand than we anticipated."
Nike has already tried to go after lululemon through the courts once before. In January 2022, it accused the company of infringing on six patents over its at-home Mirror Home Gym. As the world emerged out of the pandemic, lululemon has been billing it as a hybrid model between at-home and in-person classes.
The lawsuit was also filed in the U.S. District Court in Manhattan but ultimately fizzled out.
When it comes to the shoe line lawsuit, Lululemon has been telling media outlets that "Nike's claims are unjustified" and the company "look[s] forward to proving [their] case in court."
Some More Examples Of Prominent Design Battles
In the fashion industry, design infringement accusations are common and rarely lead to high-profile rulings. While Nike has gone after the technology itself in both cases, lawsuits more often focus on the style or pattern on a given piece.
Shein, a China-based fast-fashion company that took on longtime leaders like H&M (HNNMY) and Fast Retailing (FRCOF) 's Uniqlo with its bottom-of-the-barrel pricing, has faced numerous allegations from smaller and independent designers over the copying of designs -- in some cases not even from fashion designers but artists painting in local communities.
"They didn't remotely bother trying to change anything," U.K.-based artist Vanessa Bowman told the Guardian after seeing her painting of a local church appear on a sweater on Shein's website. "The things I paint are my garden and my little village: it’s my life. And they’ve just taken my world to China and whacked it on an acrylic jumper."china pandemic
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