Mixed Prospects for US Consumer Products, Durables Sectors
Steady demand for everyday products should keep the credit fundamentals for US consumer products stable over the next 12-18 months, according to Moody’s. But a sharp drop in purchases of discretionary, big-ticket items like boats and appliances means a negative outlook for the US consumer-durables sector.
Despite a weakening global economy, Moody’s expects revenue will grow modestly in 2009 for rated issuers in the consumer-products sector, which includes companies like Proctor & Gamble (NYSE: PG), Colgate-Palmolive (NYSE: CL), and Avon (NYSE:AVP).
Companies that will fare the best in the year ahead will be the ones with strong brand and market franchises, global sales diversity, and a limited reliance on sales of more-discretionary products.
The picture is quite different for the consumer-durables sector, however, which has seen a sharp drop in demand. Issuers in this sector include appliance manufacturers such as Whirlpool (NYSE:WHR), boat-maker Brunswick (NYSE:BC), and mattress-maker Sealy (NYSE:ZZ).
“We don’t see any signs of letup in the consumer-durables downturn until at least the second half of 2009, and then only if the government passes a substantial financial-stimulus package,” said Kevin Cassidy, Moody’s vice president and senior credit officer.
Covenant compliance is the key near-term liquidity risk for issuers in the consumer durables sector.
“We are concerned that the consumer-spending downturn will make it increasingly hard for many durable-goods companies to comply with financial covenants, which are coming under increasing pressure, especially in cases where contractual stepdowns kick in,” said Cassidy.
Moody’s expects ratings for durable-goods makers will continue to move lower, and says several issuers are at risk of losing their investment-grade rating.
About two-thirds of the consumer-durables companies Moody’s rates are currently on review for possible downgrade or carry a negative outlook.
Thus far, higher pricing for consumer products has offset modest volume declines to yield a modest increase in revenue, Moody’s said, but gross margins for a majority of issuers in the sector are contracting.
For details see “U.S. Consumer Products” and “U.S. Consumer Durables.”
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