One example we've looked at a few times was brassieres.*
From Nick Colas' DataTrek (though this piece is seven years old the points made are evergreen):
The first lead-managed equity deal I ever worked on was saving Chrysler from bankruptcy in 1991. Investment banks led by the old Salomon Brothers and First Boston (where I worked) raised $140 million for the near-dead automaker in November 1991. Money was so tight at Chrysler that our capital markets desk had to wire proceeds directly from the settlement account to some of the company’s parts suppliers, who themselves were days from insolvency.
The biggest reason investors bought into the deal: Chrysler was about to launch the Grand Cherokee, a direct competitor to Ford’s successful and highly profitable Explorer. Four door SUVs were rare back then, and consumers loved them. So much so, in fact, that the average gross margin/unit was +$15,000 versus a corporate average of $3,000.
That experience, and many more equity deals in the years after, taught me 3 things about the auto industry:
- Cyclicality is brutal on profits, but at least that cuts both ways. The Chrysler deal went off at $5/share because the company was losing $1/share in earnings. Five years later (in a better economy and with a raft of new products) the company was earning close to $5 in EPS.
- That volatility in earnings can play havoc with product development. Research & development/tooling costs for a new vehicle start at $1 billion. In 1991 Chrysler was still selling “K cars”, a platform developed in the 1970s, because it had delayed new car development during the 1988 – 1991 downturn.
- The auto global auto industry is deeply dysfunctional. Chrysler was a simple story: one region (US) and one product segment (trucks like SUVs and minivans). The worldwide auto industry is far more complex. Product preferences vary depending on everything from government regulation to fuel taxes. And, worst of all, there are far too many automakers and overcapacity leaves industry returns well below the cost of capital.
How all this relates to tech-based innovative disruption: autonomous vehicle (AV) development, design and production sits squarely atop the global auto industry’s cyclical (and fundamentally shaky) foundations. Three thoughts here:....
*January 2008:
Lazard Notes Bare Escentuals As Recession-Resistant (BARE) and Climateer thinks of Bras
This is a bit off-topic, although with some tortured logic I could make a green case for BARE. Lazard's analysts are pretty sharp and don't throw terms like "recession resistant" around just to flap their lips. Plus for some reason I was thinking of Maidenform this morning.
And no, it doesn't tell you as much about me as might be assumed. Maidenform was one of the most solid companies in the country during the Great Depression:
...By 1928 Maidenform was making nearly 500,000 brassieres a year. Sales declined only in the Great Depression year of 1932....Moreand from the PBS series "They Made America":
Narrator: In 1928, Maiden Form sold a half million bras. That year Enid Bisset left the business in poor health. The fate of Maiden Form rested on the Rosenthals' shoulders.
Koehn: She's savvy, and she understands business, and she wants to be a businesswomen. It's less clear that he's on the channel, but what is clear is that he has a very creative, very imaginative mind, as well, and so you have one plus one, but in a very unusual entrepreneurial partnership equals three.
Narrator: With William providing the product, and Ida the sales the company kept growing through the stock market crash, when glamorous boutiques like Ida's previous business seemed to disappear overnight, and through the Depression, when businesses folded around them but they continued to hire.
Coleman: Maidenform did okay in the Depression. This business was really not so sensitive to economic fluctuations. Because as it became an item that women felt they needed, and it's also an indulgence that isn't that expensive. It was something that women could buy when they didn't feel that economically powerful.
And that's my investment thesis for Bare Escentuals. Lazard's is a bit more sophisticated.
Via 24/7 Wall Street:
Bare Escentuals, Inc. (NASDAQ: BARE) may be one sweet spot that is at least partially immune from the ups and downs of consumer spending. Today we are getting word out of Lazard Capital Markets that its analyst Jacklyn Rider, its Healthy Lifestyles analyst, is reiterating her Buy rating on Bare Escentuals with a $27.00 target as she feels the growth story is unchanged.
This is fairly new coverage from Lazard Capital Markets as it appears the firm initiated it with a Buy rating earlier this month. This call is after the company's management presented at the ICR Xchange conference in California last week to a standing-room only crowd. The company reiterated its long-term growth opportunities to acquire customers, cross-sell products, and expand its points of distribution and international business.
Some of the points noted was a back to basics approach for new products and this note even discusses a recession-resistant product line that "is less sensitive to economic factors and that women will give up other discretionary items before makeup." Ms. Rider also noted that channel checks indicate that customer demand and enthusiasm for Bare Escentuals' products have not seen any slowdown....MORE
The stock's up a dime with the market down a hundo.
If interested here's a list of "150 Highly Successful Companies Started During a Recession"
