The Federal Reserve may have quietly sowed the seeds of an internationally based acquisition boom this year that helps to support even higher asset prices for all sorts of powerful entities.
How so? By signaling months ago that it intended to raise interest rates by the middle of this year, which had the effect of triggering an explosive move in the U.S. dollar. That has made acquisitions of foreign assets much more attractive, especially as boards begin to grow weary of continuing to pump money into share repurchases at present valuations. At some point, new growth platforms have to be secured through acquisition in order to support future earnings growth.
"International is looking more and more attractive to us because of the strength of the U.S. dollar, and we're continuing to have discussions with people," pointed out VF Corp. (VFC) CEO Eric Wiseman on a Feb. 11 earnings call. The company has particular interest in outdoor and action sports brands. Beverage giant Pepsi (PEP) has been quiet on the acquisition front since shelling out roughly $5.4 billion in 2010 for Russian dairy products and fruit juice maker Wimm-Bill-Dann. That deal came during a period of relative dollar strength (see smaller purple arrow below).
But Pepsi has the financial firepower to buy a foreign strategic asset to bolster either its drinks or snacks businesses. "We feel like we have the portfolio in a pretty good spot right now," said Pepsi CFO Hugh Johnston to TheStreet on Feb. 11. He added, "We'll see what comes along -- we are constantly out there talking to basically everyone." Pepsi generally allocates about $500 million each year to small, "tuck-in" acquisitions.
I wouldn't be surprised if the acquisition news begins to flow in the second quarter following months of talks with notoriously finicky overseas boards and with the U.S. dollar continuing at its lofty levels.
Retail Winners and Losers
I exited the earnings-season bunker on Monday to chat on-air about the broader retail reporting season that kicks off this week with Wal-Mart (WMT; watch full video here). Here is some greater insight into potential winners and losers.
Best Buy (BBY): I have been bullish on the name, and continue to be right into the teeth of the Apple Watch rollout. I like how the company is transforming its sales floor into an amusement park of cool tech gear, and expect more shops to be opened this year, including those from GoPro (GPRO) and vacuum maker Dyson. These shops are giving people a reason to visit a Best Buy, as is the company's price-matching promise. Showrooming at Best Buy is dead.
VF Corp.: I had a nice talk with its CFO after the earnings call last week. Not only does the company give people a way to play the prolonged winter weather (North Face and Timberland brands), but will have a host of new lightweight jacket technologies hitting in the spring. Further, the company's jeans business has turned the corner amid market-share gains at department stores. 2016 should also bring new product platforms from the company's recently opened innovation centers.
Sears (SHLD): Best be prepared for the mother of all bad earnings reports from Sears very soon. Wal-Mart's holiday season was OK. Target (TGT) regained momentum. J.C. Penney (JCP) did rather well. All signs point to pure disaster for Sears that will trigger a penalizing capital raise in order to keep suppliers at ease for this coming holiday season. Expect to learn of hundreds of more store closures this year after 230 or so in 2014. Disclosure: The VP of communications (@ChrisBrathwaite) at Sears has blocked me on Twitter (TWTR). It's yet another example of unprofessional behavior from a company in internal disarray. (Read more.)
Abercrombie & Fitch (ANF): The company still has not found a CEO to replace embattled Mike Jeffries. New products from new brand presidents will not arrive until late spring. Competition is getting ruthless. And teens are fundamentally dressing differently at school; more Under Armour (UA) joggers, less Abercrombie T-shirts and jeans. I also believe the company's international flagship stores are underperforming the internal expectations of execs. Expect bone-crushing first-quarter guidance.