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Tight-fisted manufacturers now have best grip to hang on
Toughened by long fight with importers, they feel less pain in finance crisis
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Published: September 20, 2008
NEW YORK - As Wall Street reveled in risky debt earlier this decade, such manufacturers as Caterpillar Inc. guarded their cash. Now, with credit markets so volatile, the party poopers seem in the best position to weather the crisis.
Some manufacturers, battling with lower-cost overseas rivals, have kept a tight grip on finances for years, even as banks and Wall Street firms loaded up their balance sheets with dicey mortgage-backed investments.
Even recent revelers, such as clothing chains and home builders, have buckled down in the past year after real estate slumped and shoppers cut spending, humbling those companies into building up cash and lightening debt.
"The balance sheets of nonfinancial companies are in the best shape they have been in for many years, owing to cautious use of cash flow during the last expansion -- a pattern that extends around the globe," Lewis A. Sanders, the chief executive of AllianceBernstein, an investment company, said in a note to clients this week.
Since 1990, liquid assets -- cash and cashlike securities -- at nonfinancial businesses have skyrocketed, totaling $1.62 trillion at the end of 2007, according to the Federal Reserve. That figure is about 10 times the size of the federal government's 2008 fiscal stimulus package. The Fed assessment of liquid assets includes money in commercial paper, banks, and other liquid securities.
That available cash grew more important this week, as the market for short-term loans that companies use to finance daily operations gyrated between frozen and flush. Banks and companies shrank from the market for commercial paper, whose proceeds are used to pay workers and suppliers, for example. Then they came back in yesterday after confidence was bolstered by a government plan to rescue banks from billions of dollars in bad debt.
The SPDR Lehman High Yield Bond exchange-traded fund -- which many investors use to gauge sentiment in credit markets -- was trading nearly 3 percent above net-asset value by early yesterday afternoon after trading more than 4 percent below net-asset value the day before, suggesting greater confidence.
Large manufacturers such as Deere & Co. and Caterpillar haven't felt Wall Street's pain.
"There hasn't been excessive borrowing," said Alexander M. Blanton, an analyst at Ingalls & Snyder, because of healthy cash flows resulting from leaner management and manufacturing practices in recent years.
Manufacturers have become much more efficient users of capital. For instance, they have reduced capital spending by getting rid of inventory and shrinking floor space needed for production, he said. That system, pioneered by Toyota Motor Corp., has been adopted by U.S. industry over the past 20 years.
Caterpillar, which makes backhoes for construction and engines for trucks, and also runs a financing business, has $6 billion to $7 billion in unused credit lines with banks, "which is more than enough to finance any short-term needs of the credit corporation," Blanton said.
Caterpillar believes that the worst that could happen is that it won't be able to expand lending to customers, according to Blanton. It offers financing to its dealers and such customers as truck-makers.
Other sectors are also seen as able to withstand a credit squeeze. Paul Nisbet, an aerospace analyst with JSA Research Inc., said that most defense companies have significant amounts of cash on their balance sheets after several years of strong earnings. Profits have been fed by Pentagon spending on two wars and new weapons programs.
Toys and specialty-apparel retailers are protected because they are fairly debt free and have a cash cushion established before the housing crisis sapped consumers. And with the current weak retail environment, few chains are contemplating large expansions.
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