The Wall Street Journal - 22.08.2019

B12| Thursday, August 22, 2019 THE WALL STREET JOURNAL.

Time to Buy Back Bayer

Hints of progress shown toward a resolution to Roundup-related legal woes

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FINANCIAL ANALYSIS & COMMENTARY

The Trouble With

Rate Cuts in China

The People’s Bank of China doesn’t want the

housing market flooded with fresh credit

Like President Trump, China’s

leaders want lower interest rates.

The constraint they face isn’t an

independent central bank but a

bubble-prone property market.

This week, the People’s Bank of

China revealed a long-anticipated

change to how commercial bank

interest rates will be calculated.

Revealingly, PBOC officials were at

pains to stress that while the

move might lower interest rates

for corporate lending, mortgage

interest rates wouldn’t fall.

Eighteen banks now have to

show the PBOC the best interest

rates they offer to their clients,

based on rates set by the central

bank’s medium-term lending facil-

ity, a source of credit for the banks

themselves.

The change has two objectives.

One is to lower rates for some

loans. Previously, the banks had to

base their lending rates not on the

MLF but on China’s benchmark

rate, which is roughly a percentage

point higher for one-year loans.

The other is to improve the trans-

mission mechanism for monetary

policy: The PBOC wants banks to

do a better job of passing changes

in policy on to their customers.

The reform is described widely

as a market-oriented liberalization,

but it isn’t entirely clear why. The

PBOC is making banks calculate

their lending rates based on one

interest rate it administers, rather

than another interest rate it ad-

ministers. Rates for the one-year

MLF have barely changed in the

past three years.

The most interesting aspect of

the new approach is the exclusion

of real estate. This is likely be-

cause Chinese households went on

a borrowing spree after the PBOC’s

2015 round of benchmark rate

cuts. In 2016, household debt rose

by 6.2 trillion yuan ($877.80 bil-

lion)—compared with an increase

of around 3 trillion yuan a year on

average for the previous five

years—and only accelerated

subsequently.

Beijing is also aware of the

other lesson from its last round of

interest-rate cuts: They helped

send the yuan sharply lower, in

turn triggering capital outflows.

The PBOC may be comfortable

with the yuan trading past 7 to the

dollar, but a much weaker cur-

rency isn’t its ambition.

This week’s announcements are

more a reflection of China’s lim-

ited monetary options than a

grand effort to liberalize how

credit is dished out. The PBOC’s

existing tools can’t be deployed

without generating the same wor-

rying imbalances as last time.

—Mike Bird

“A boat is a hole in the water

you throw money into,” is how the

saying goes. Investors who have

put money into Brunswick lately

can relate.

Shares of the boat maker have

slipped about 30% in the past year

and are flirting with their lowest

levels since 2016. Concerns about

the macroeconomic environment

have been compounded by a tough

spring selling season that led to

elevated levels of unsold boats in-

dustrywide. Worries about the

staying power of the U.S. economy,

given how badly the last recession

treated Brunswick, have only made

matters worse.

But Brunswick is more seawor-

thy than it was in the past, and in-

vestors might want to step on

board.

Brunswick first made its mark

as a billiards-table maker in the

1840s, but by the early 2000s was

a conglomerate that included

bowling and fitness equipment,

but mostly boats and boat engines.

They were all bad places to be

when the last recession struck—

particularly boats, where many

people’s purchases had been predi-

cated on the high value of their

homes. At their nadir in 2008,

Brunswick’s shares were down 96%

from their 2004 peak and fetched

just over $2.

Since then, Brunswick has sim-

plified itself, shedding its bowling

business in 2014 and its fitness

and billiards business earlier this

year. It exited its upscale yacht

business last year and is now fo-

cused on what it calls activity-

based boats, such as fishing boats,

which are less economically sensi-

tive.

Brunswick’s outboard engine

business has been benefiting from

a shift away from traditional

sterndrive boats. Its parts and ac-

cessories division, which provides

a steady income stream, has

grown and now accounts for about

half of Brunswick’s profit. It has

Brunswick'sforwardprice/earnings

multiple

Source: FactSet

20

5

10

15

2015 2016 2017 2018 2019

Before Federal Reserve Chair-

man Jerome Powell puts the fin-

ishing touches on a speech he is

delivering Friday, maybe he should

take some time to listen to a play-

back of Target ’s earnings confer-

ence call.

Or Walmart ’s, Home Depot ’s

and Lowe ’s. Strong results from

some of America’s biggest retailers

suggest worries that an unsettled

global environment is about to

send U.S. consumers into retreat

are overblown.

Target, the nation’s eighth-larg-

est retailer by sales, said Wednes-

day it earned $1.82 a share in its

fiscal second quarter, with same-

store sales up 3.4% from a year

earlier, topping analyst estimates.

Its stock rose 20% Wednesday.

Lowe’s, the country’s ninth-larg-

est retailer, on Wednesday also

beat analysts’ estimates for sec-

ond-quarter earnings and same-

store sales, sending its stock up

10%. Those moves follow pleasing

results from Home Depot, the

sixth-largest retailer, on Tuesday

and Walmart, No. 1, last week.

Yet worries about the U.S. econ-

omy are pitched enough that the

Fed appears on track to cut inter-

est rates again when it meets next

week. And at the Federal Reserve

Bank of Kansas City’s annual sym-

posium in Jackson Hole, Wyo., on

Friday, Mr. Powell will likely point

to the possibility of further rate

cuts if those worries intensify.

President Trump, meanwhile,

continues to castigate the Fed for

not cutting rates enough and has

floated the possibility of cutting

taxes, though he later reversed

himself.

What makes the disconnect

even more remarkable is that big

retailers aren’t just reporting good

results, they are expressing a lot

optimism. Target raised its earn-

ings forecast for 2019, as did Wal-

mart. Home Depot said escalating

tariffs with China might rattle con-

sumer confidence, but also that

real-time data don’t show this yet.

“Consumer confidence is near

record-high levels, and wages are

up over 3% from last year,” Home

Depot Chief Financial Officer Carol

Tomé said.

To be sure, it isn’t sweetness

and light for all retailers, with de-

partment stores such as Macy’s

continuing to do poorly. But those

woes seem to reflect shifts in the

ways Americans shop rather than

in overall spending. Unless the job

market shows signs of faltering, it

is hard to see why consumers

might suddenly get cold feet.

At a certain point, the danger-

ous downshift in consumer spend-

ing the Fed is wary of is either go-

ing to come, or the central bank

will have to conclude its fears

were misguided.

—Justin Lahart

As the Fed Frets, Retailers Rake In Sales

The legal liabilities associated with Monsanto’s Roundup weedkiller may be about to become clearer.

JOSH EDELSON/AGENCE FRANCE-PRESSE/GETTY IMAGES

also entered into the boat club

business, which offers members

access to a fleet of boats for an

annual fee.

Those moves won’t eliminate

cyclicality from the business,

much less make it recession

proof, but they should keep it

from reaching for the Dramamine

with every ripple in the economy.

Moreover, the troubles the in-

dustry experienced earlier this

year don’t appear to have been

the result of a cooling of con-

sumer demand, but rather months

of flooding in the Midwest that

kept would-be customers off the

water. That will continue to weigh

on business in the months ahead

as dealers work off inventory, but

that is reflected in analysts’ esti-

mates.

Yet investors remain worried

Brunswick is headed for the

shoals. Its stock trades at just 9.4

times expected earnings, which is

close to its lowest price/earnings

ratio since 1999 and well below

the median of 13.7 it has carried

over the past 20 years. Absent a

severe economic storm, Brunswick

shares could soon be riding higher

in the water.

—Justin Lahart

Don’t let the corporate crisis at

Bayer go to waste.

Now is probably a good time for

investors to buy back into the Ger-

man pharmaceutical and agricul-

ture conglomerate after its ill-

fated $63 billion acquisition of U.S.

seed giant Monsanto. The legal lia-

bilities associated with Monsanto’s

Roundup weedkiller, which various

U.S. juries have tied to cancer, may

be about to become clearer, paving

the way for a recovery in Bayer’s

battered stock.

This month, judges in St. Louis

delayed two imminent Roundup

cases, a move that hinted at prog-

ress in talks between the company

and plaintiffs. Bayer wants a set-

tlement of between $6 billion and

$8 billion while plaintiffs want

more than $10 billion, according to

a Bloomberg report, though a key

mediator denied any discussion of

numbers.

The stock has risen 14% so far

this month, but it is still more

than a quarter below its level be-

fore the Roundup disaster broke

into the open last summer with an

unfavorable court ruling in Califor-

nia. The stock-price drop equates

to roughly €25 billion ($28 billion)

in market value over a period

when the Euro Stoxx 50 Index is

down just 1%.

Whatever the eventual settle-

ment, it will likely be far lower

than $30 billion. At the end of

June there were 18,400 claimants.

In cancer suits against DuPont ,

Takeda and Pfizer since 2012,

claimants have ended up with

awards of between roughly

$170,000 and $270,000 each, sug-

gesting a total cost to Bayer of be-

tween roughly $3 billion and $5

billion. The claimant count will no

doubt grow, but investors need ag-

gressive assumptions to get above

a cost estimate of even $15 billion.

There are other signs that Bayer

stock has fallen too far. It trades

on nine times expected earnings,

compared with 21 times for Cor-

teva Agriscience , the seed-and-

pesticide maker spun out of

DowDuPont this year, and 14 times

for big U.S. pharma stocks.

The deal Bayer announced Tues-

day to sell its animal-care business

to U.S. peer Elanco only makes the

German stock look cheaper. The

$7.6 billion price tag works out at

almost 19 times the unit’s earnings

before interest, taxes, depreciation

and amortization for the year

through June. Bayer itself has an

enterprise value of just eight times

trailing earnings based on the cur-

rent stock price. The company has

also sold off various drugstore

brands this year, including Copper-

tone and Dr. Scholl’s.

There is little evidence so far

that Roundup sales are suffering

from the negative publicity, which

might be another valid reason for

Bayer’s low share price. Its herbi-

cide business, which accounted for

11% of its first-half sales, has been

weak this year, but mainly because

spring floods delayed and reduced

planting in the Midwest. The farm-

ers who buy most Roundup may

not be too sensitive to the judg-

ments of Californian juries.

Bayer is a classic “special-situa-

tion” stock whose near-term per-

formance will depend less on oper-

ating profit than on developments

in the Roundup courtroom drama.

A year after the case first hit the

headlines, events are finally mov-

ing in investors’ favor.

—Stephen Wilmot

China’shouseholddebt,changefrompreviousyear

Source: Bank for International Settlements

Note:1 trillion yuan=$141.6 billion

8

0

2

4

6

trillion yuan

2007 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18

Facebook said earlier this month it

would rebrand its photo-sharing app as

“Instagram from Facebook.” Its us-

ers are already acting the

part.

This week, a bogus

post warning of an Insta-

gram privacy change

went viral, sparking panic

among the app’s users,

including major celebri-

ties and politicians. Ac-

cording to the post, In-

stagram would make

users’ activity on the

app public, unless they

posted their nonconsent.

American singer-songwriter

Pink’s retaliatory post, cap-

tioned “Better safe than sorry,

even if it is a hoax,” garnered

over 91,500 likes in a mere

18 hours. The threat was a

hoax, of course, as confirmed by an In-

stagram spokesperson.

Instagram’s privacy policy, to which

all of its more than one billion users

agreed, states that it can share user

content with affiliates and information

with third-party organizations. The joke

is clearly on Instagram’s users, who not

only agreed to that policy, but also

should have learned from previous simi-

lar scares, beginning on Facebook in

2012.

Meanwhile on Twitter, users mocked

the credulity of Instagram’s userbase,

likening them to their elders on Face-

book. All of Instagram “has become my

83-year-old grandmother,” said one

post. Another dubbed Instagram’s users

“locals who belong on Facebook.”

It does seem concerns are only skin

deep. As one Instagram user tweeted, “I

would def stop using the app if I

weren’t as vain as I am right now.”

Worries About Brunswick

Should Blow Over

FELIPE TRUEBA/EPA/SHUTTERSTOCK

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