Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Global Equity Strategy ----------------------------------------------------------------------------------------
Corporates: the marginal buyer of equities
● We are bullish of equities partly because we think the corporate
sector will likely be a net buyer, both through cash-financed M&A
activity and buybacks.
● The FCF yield is above the corporate bond yield, close to 50-year
highs and the prospective earnings yield is 2.6 p.p. above the
BBB corporate bond yield, which is also close to a 50-year high.
The quoted corporate sector has very low leverage with US
corporates having record cash on their balance sheets.
● Historically, investment spending intentions & business
confidence surveys lead M&A by about two years and suggest a
pick-up in M&A now. 23% of companies in Europe trade below
replacement value, making it cheaper to buy than to build.
● Investment implications. Equities should be supported by
corporates being a major buyer. Over the past four weeks,
corporate net buying has been 1.9% of market cap, nearly triple
its three-year average. Sectors: in Europe, telecoms, pharma and
semis have the greatest scope for an increase in M&A on our
scorecard.
Corporates: the marginal buyer of equities
One reason we remain bullish of equities is that we think that the
corporate sector will emerge as a significant buyer of its own stock.
We think corporate net buying (via buybacks or cash-financed bid
activity) will pick up for the following reasons.
(1) The FCF yield is high relative with the cost of debt: The gap
between the FCF yield available in the equity market and the cost
of debt for BAA-rated companies is extremely wide, while the
earnings yield is abnormally high relative to the BAA corporate
bond yield. We also highlight that 71% of US companies have a
FCF yield that is at least 100bps above the corporate bond yield
(we assume the corporate bond yields rise by c100bps in case of
significant buyback activity).
(2) The balance sheet of the quoted corporate sector is in good
shape: Cash on the balance sheet of the US non-financial
corporate sector is very high, although this is only one side of the
balance sheet. According to our US accounting analyst David
Zion (Parking Earnings Overseas, 26 April 2011), US
corporations hold c$1.3 tn of funds abroad in the form of
undistributed earnings. This money is effectively lying idle and
could be a good source of funds.
(3) Corporate investment intentions suggest a rebound in buy-backs
and M&A: CEO business confidence remains high and, despite
their recent fall, Philly Fed spending intentions are still strong.
These surveys tend to lead not only investment, but also M&A
and buyback activity—yet they do so with a lead time of a couple
of years (in the case of CEO business confidence).
(4) Our recent survey in Europe points to a pick-up in M&A: Credit
Suisse regularly polls over 50 large corporates in Europe to
analyse their corporate spending plans. This survey suggests
that companies are looking not only to increase capital spending,
but also to step up their acquisition plans. Of those companies
that expect to increase corporate actions, half said they would do
so through M&A—this is more than double the number of
respondents that said they would pay down debt.
(5) M&A tends to lag the economic cycle by one to two years: M&A is
running at very low levels – yet, historically it has tended to pick up
around one to two years into the economic cycle. The more the bull
market continues and the more time passes since the last
recession, the more corporates tend to be willing to invest for the
future. M&A as a proportion of market cap is running at 3.4% of
market cap compared to a 30-year average of 5.5%. Put
differently, M&A tends to pick up about 12 months after the trough
in equity market momentum and to peak after a peak in market
momentum.
(6) In many instances, it is cheaper to buy than build: In aggregate,
non-financial corporates tend to trade in line with their replacement
value, on Tobin’s equity Q using the US flow of funds data. 28% of
the stock market in continental Europe still trades on less than a
10% premium to its replacement value on Credit Suisse HOLT®,
which implies it is almost as cheap to buy as to build.
What are the investment implications?
We think the investment implications of a likely pick-up in M&A are:
(1) Equities should be supported by corporates being a major buyer
(2) We screen for stocks (analysed purely from a quant perspective)
that should benefit from a pick-up in M&A looking for the following
characteristics: a) Companies that theoretically could take
themselves private; b) Companies that are potential M&A
candidates or where buybacks could increase, based on our
measures of cash flow and leverage; c) Companies who trade
below replacement value but are value-creating; d) Stocks with the
highest scope to increase share buybacks, according to our
analysts.
(3) A pick-up in M&A might help investment banks
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Global Equity Strategy ----------------------------------------------------------------------------------------
Corporates: the marginal buyer of equities
● We are bullish of equities partly because we think the corporate
sector will likely be a net buyer, both through cash-financed M&A
activity and buybacks.
● The FCF yield is above the corporate bond yield, close to 50-year
highs and the prospective earnings yield is 2.6 p.p. above the
BBB corporate bond yield, which is also close to a 50-year high.
The quoted corporate sector has very low leverage with US
corporates having record cash on their balance sheets.
● Historically, investment spending intentions & business
confidence surveys lead M&A by about two years and suggest a
pick-up in M&A now. 23% of companies in Europe trade below
replacement value, making it cheaper to buy than to build.
● Investment implications. Equities should be supported by
corporates being a major buyer. Over the past four weeks,
corporate net buying has been 1.9% of market cap, nearly triple
its three-year average. Sectors: in Europe, telecoms, pharma and
semis have the greatest scope for an increase in M&A on our
scorecard.
Corporates: the marginal buyer of equities
One reason we remain bullish of equities is that we think that the
corporate sector will emerge as a significant buyer of its own stock.
We think corporate net buying (via buybacks or cash-financed bid
activity) will pick up for the following reasons.
(1) The FCF yield is high relative with the cost of debt: The gap
between the FCF yield available in the equity market and the cost
of debt for BAA-rated companies is extremely wide, while the
earnings yield is abnormally high relative to the BAA corporate
bond yield. We also highlight that 71% of US companies have a
FCF yield that is at least 100bps above the corporate bond yield
(we assume the corporate bond yields rise by c100bps in case of
significant buyback activity).
(2) The balance sheet of the quoted corporate sector is in good
shape: Cash on the balance sheet of the US non-financial
corporate sector is very high, although this is only one side of the
balance sheet. According to our US accounting analyst David
Zion (Parking Earnings Overseas, 26 April 2011), US
corporations hold c$1.3 tn of funds abroad in the form of
undistributed earnings. This money is effectively lying idle and
could be a good source of funds.
(3) Corporate investment intentions suggest a rebound in buy-backs
and M&A: CEO business confidence remains high and, despite
their recent fall, Philly Fed spending intentions are still strong.
These surveys tend to lead not only investment, but also M&A
and buyback activity—yet they do so with a lead time of a couple
of years (in the case of CEO business confidence).
(4) Our recent survey in Europe points to a pick-up in M&A: Credit
Suisse regularly polls over 50 large corporates in Europe to
analyse their corporate spending plans. This survey suggests
that companies are looking not only to increase capital spending,
but also to step up their acquisition plans. Of those companies
that expect to increase corporate actions, half said they would do
so through M&A—this is more than double the number of
respondents that said they would pay down debt.
(5) M&A tends to lag the economic cycle by one to two years: M&A is
running at very low levels – yet, historically it has tended to pick up
around one to two years into the economic cycle. The more the bull
market continues and the more time passes since the last
recession, the more corporates tend to be willing to invest for the
future. M&A as a proportion of market cap is running at 3.4% of
market cap compared to a 30-year average of 5.5%. Put
differently, M&A tends to pick up about 12 months after the trough
in equity market momentum and to peak after a peak in market
momentum.
(6) In many instances, it is cheaper to buy than build: In aggregate,
non-financial corporates tend to trade in line with their replacement
value, on Tobin’s equity Q using the US flow of funds data. 28% of
the stock market in continental Europe still trades on less than a
10% premium to its replacement value on Credit Suisse HOLT®,
which implies it is almost as cheap to buy as to build.
What are the investment implications?
We think the investment implications of a likely pick-up in M&A are:
(1) Equities should be supported by corporates being a major buyer
(2) We screen for stocks (analysed purely from a quant perspective)
that should benefit from a pick-up in M&A looking for the following
characteristics: a) Companies that theoretically could take
themselves private; b) Companies that are potential M&A
candidates or where buybacks could increase, based on our
measures of cash flow and leverage; c) Companies who trade
below replacement value but are value-creating; d) Stocks with the
highest scope to increase share buybacks, according to our
analysts.
(3) A pick-up in M&A might help investment banks
No comments:
Post a Comment