With the global economy at risk of a deep recession, many
battered areas of the economy stand to suffer more damage in coming
months. Other industries, though, seem poised to withstand even a
severe downturn.
The health care sector should hold up especially well even in a
recession, along with defense and a few other industries. Still,
analysts say a unique collision of economic and political challenges
means many businesses might not be as well-insulated as they were in
past recessions. Here's a look at major industries that, if not exactly
recession-proof, seem best able to endure the downturn:
_Health care
With an aging population and the largest health care spending in the
world, the nation's medical sector could fare perhaps best of all.
During economic downturns, sales of prescription drugs and medical devices tend to hold up better than nonessential goods, noted David Wyss, chief economist of Standard and Poor's.
"Generally, you're looking for things that are necessities, not
luxuries," Wyss said. "People get sick and need medical care regardless
of the state of the economy."
But recent earnings show that drug makers aren't immune from
slumping sales that have plagued their peers in the retail and auto
industries. Pfizer said last month that U.S. sales of its best-selling
product, the cholesterol drug Lipitor, fell 13 percent in the last
quarter as some financially struggling patients stopped filling their
prescriptions.
"The typical safe harbors (for investors) have been
pharmaceuticals," said analyst Steve Brozak of WBB Securities. "They're
no longer safe; they're now the least bad choice."
Pfizer and Schering-Plough Corp. were able to offset weak revenue in
the U.S. with higher sales abroad. But other companies, such as Merck
& Co. Inc., have been less successful. Merck said recently it will
cut 7,200 jobs after reporting sales declines.
Experts say pharmaceuticals are more vulnerable to economic cycles
because employers have shifted more of the financial burden for care to
patients, with higher copays and deductibles.
"With consumers having more cost-sharing in their benefits, you're
going to see a greater effect on their health care spending right
away," said Paul Ginsburg, President of the nonprofit Center for
Studying Health System Change.
The lagging economy and rising unemployment have made it harder for
health insurers such as UnitedHealth Group Inc. and Humana Inc. to
raise prices to offset higher costs and investment losses.
Health care
companies least affected are those that sell inexpensive medical
products directly to hospitals, bypassing cash-strapped consumers.
Becton, Dickinson & Co. and Baxter International Inc., for
example, reported sharp profit gains for the most recent quarter and
boosted their full-year earnings estimates. Becton Dickinson
specializes in syringes and surgical tools; Baxter sells drugs to treat
blood and immune disorders.
"The products they offer aren't high-tech things," said Aaron
Vaughn, an analyst with Edward Jones. "They are health care staples
that people need."
A focus on lifesaving medicine is also expected to reward makers of
high-priced biotechnology drugs. Genzyme Corp. and Celgene Corp., for
example, have built businesses around niche drugs for life-threatening
diseases. Health care investment firm Leerink Swann gives both
companies an "outperform" rating, along with peers Amgen Inc., Biogen
Idec Inc. and Gilead Sciences Inc.
_Defense
With the government spending hundreds of billions of dollars to
fight wars in Iraq and Afghanistan, most big defense-related companies
should also be able to withstand recessionary pressures.
Military spending has soared about 40 percent during the Bush administration, pushing up the stocks of General Dynamics
Corp. and its competitors. The company's chief executive, Nicholas
Chabraja, has pointed to General Dynamic's backlog of orders - totaling
$60.5 billion at the end of the quarter - as a sign of the company's
long-term strength.
Rivals such as Northrop Grumman Corp. and Lockheed Martin Corp. also
have contracts that stretch decades into the future, as well as large
cash reserves.
Analysts caution, though, that long-term problems loom for the
sector. Both presidential candidates have called for reforms on how
defense contracts are awarded, and many analysts see the government's
$700 billion bailout plan as a crimp on future spending.
It seems "nearly impossible" that future military budgets "will
remain unscathed by the current fiscal reality," Ronald Epstein, a
Merrill Lynch analyst, wrote in a recent note.
JSA Research analyst Paul Nisbet said that even a partial withdrawal
from Iraq would hurt ammunition manufacturers such as Alliant
Techsystems Inc. and General Dynamics. Democratic candidate Barack
Obama has also expressed skepticism about the level of spending on
missile defense - a revenue generator for Raytheon Co. and Boeing Co.
By contrast, Nisbet said companies such as Boeing and Goodrich Corp.
are better positioned to weather defense cuts because much of their
business involves the private aviation market.
_Food and consumer staples
While health insurers and defense contractors are subject to policy
changes in Washington, other sectors are more stable. Food companies
such as Kraft Foods Inc. and Kellogg Co. tend to perform fairly
consistently, even during tough times, which is why their stocks are
holding up well, analysts say.
General Mills, maker of Cheerios and Pillsbury products, is one of
the best-performing stocks in the S&P 500. Its strong brands have
helped it outperform competitors for years.
As consumers begin eating at home more often, they are boosting
sales at chains such as BJ's Wholesale Club Inc. that can deliver
groceries at the lowest price, often at the expense of more high-end
companies. Shares of Whole Foods Market Inc. have lost three-quarters
of their value this year as the organic-food retailer lowered its
outlook and suspended its quarterly dividend indefinitely.
At the same time, chains such as Costco Wholesale Corp. and Kroger
Co. have reported rising earnings as shoppers trade down to
lower-budget store brands.
_Tobacco and alcohol
Beer and cigarettes don't seem as indispensable as food and
medicine, but demand for tobacco and alcohol tends to remain strong in
tough economic times.
Last month, Philip Morris International Inc. and Reynolds American
Inc. reported results that topped Wall Street expectations. Executives
said steady sales show consumers remain loyal to tobacco products even
as they cut back on other expenses.
"No business in the world is actually recession-proof, but I am
convinced that our business is very recession-resilient," said Hermann
Waldemer, chief financial officer of Philip Morris.
The company, which reported it had $1 billion more in cash than
short-term debt in June, said it generates more than $10 billion in
operating cash per year.
The beer industry has proved nearly as elastic. Its sales to
retailers have risen about half a percent for the year, according to
trade publication Beer Marketer's Insights. Though that's down from
last year's 1.4 percent growth rate, analysts say the business is still
performing relatively well.
"Vices tend to be a good place to seek shelter because people pretty
much support their vices - at least the cheaper ones," said S&P's
Wynn.
AP Business Writers Stephen Manning in Washington, Emily Fredix in
Milwaukee and Vinnee Tong in New York contributed to this report.
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