No one likes a recession, but not all companies are equally hit by its force and ferocity. When we get the quarterly earnings numbers it is easy to spot the industries really suffering and those holding their own.
Automobile manufacturers and airlines for instance, instantly come to mind as those being hit hardest. Even the prospect of the economic turnaround doesn’t add much cheer to their balance sheets.
But then there are those industries described as recession resistant or, best of all, recession proof. If you are lucky enough to be in one of these businesses, well, the great recession of 2009 may have taken its toll, but it hasn’t floored you completely.
Companies that are recession resistant or recession proof will weather the storms whatever the economy throws our way. The problem is identifying them and being sure the old rules are holding true.
Traditionally among this group are the three Cs: candies, cakes and cookies. Apparently we all still have a sweet tooth and are prepared to spend hard-earned cash on such “little luxuries. Alcoholic drinks sales also usually hold up in a recession, although here we frequently trade down from premium to cheaper brands hoping to get the same buzz but at a cheaper price. Another retail group that can thrive is the fast food sector.
The latest earnings season tells us that we still treat ourselves to pizza in tough times. Domino’s, the home delivery company, seems pretty recession resistant as it upgraded its earnings forecast for the rest of the year. Even if we are cutting back at eating out in expensive restaurants, ordering a pizza at home is an everyday luxury we will still enjoy.
Staying with the earnings season, last week we saw evidence that some industries are most definitely not recession immune. Video game console makers reported horrible numbers. Nintendo’s sales were down by more than 50 percent, while Sony’s Playstation sales dropped by a third. The console makers are blaming a lack of blockbuster new games coming onto the market. I don’t play computer games (yet) but it seems to me it’s not a lack of new games, but a lack of money to spend that is the real issue. Except for the hardened players, most of us do not put buying expensive video “stuff high on the priority list.
On the other hand, we are apparently still prepared to spend money on health and wellbeing, at the most basic level. Pharmaceutical companies like Astra Zeneca and Glaxo SmithKline reported strong results that reflected their own products and companies rather than the economy at large. Both companies’ CEOs were happy to tell me that from their reading of the results drug companies were at least resistant to the recession, if not actually recession proof.
From an investor’s point of view, recession resistant companies often do the best during a deep and hard-fought recession. Longer term they may suffer though because they don’t see the need to make harshest competitive cost cutting that other companies are forced to take to stay alive. Nothing keeps you bloated better than complacency.
Of course a lot of this is just plain common sense, and you can see it happening before your very eyes. Sometimes the unexpected can throw you. We had always been told by the computer industry that the games business was recession resistant. Pah!
So let me suggest a simple test for you to decide whether you think an industry is recession resistant. Look around you at the things that you, your family and your friends are still spending hard earned (and dwindling) cash on. Business sense is common sense. If you are all still buying these things, it’s a fair bet other people are too.
Tune in to Richard Quest each weekday at 9 pm Cairo (9 pm Kuwait, 9 pm Riyadh, 10 pm Dubai) on Quest Means Business. For more information go to www.cnn.com/qmb.