What Will Businesses Spend On? - Ahead of Wall Street


Tuesday, May 27, 2014

Stocks made strong gains last week, with the S&P 500 making a new all-time high and closing above the 1900 level for the first time, with even the small-caps participating in the gains. The positive trend will likely continue today as well, despite the mixed Durable Goods report this morning. The Case-Shiller home price index and the Conference Board's consumer confidence report are expected.

The April Durable Goods reading came in better than expected on the 'headline,' weak at the 'core' level, but with positive revisions for the prior-months level. 'Core' Durable Goods, officially called non-defense capital goods excluding aircraft, is generally considered a proxy for business capital spending. The overall hope in the market is that businesses will start ramping up their outlays this year on equipment, software and structures, which has been a missing pieced in this recovery thus far.

With record cash on their balance sheets, companies certainly have the wherewithal to spend more. But they have been hesitant to do that, citing weak demand in the market. They have instead been returning cash to shareholders instead through dividends and share buybacks. The trend has lately shifted to outright acquisitions, with companies more appearing to be more willing to buy their rivals than invest in organic growth.

This morning's announcement of Pilgrim Pride ( PPC ) acquiring Hillshire ( HSH ) for roughly $5.5 billion follows the latter's plans to buy out Pinnacle Foods ( PF ) for $4.3 billion. We have seen plenty of similar deals in the food, pharmaceutical and technology sectors. The surge in M&A announcements is certainly a sign of greater confidence in the business and economic outlook and could be a precursor to increased capital spending in the days to come.

Recent economic data has been showing a rebound in growth in the current period after the first quarter's flat finish. But the rebound in activity levels has not been all around, with growth in retail sales, industrial production and housing not as robust as many had been hoping for. This likely indicates that some of the more optimistic GDP growth estimates for the current period may need to come down.

Sheraz Mian
Director of Research

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HILLSHIRE BRAND (HSH): Free Stock Analysis Report

PINNACLE FOODS (PF): Free Stock Analysis Report

PILGRIMS PRIDE (PPC): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Stocks , US Markets

Referenced Stocks: HSH , PF , PPC



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