MARKET Monthly compilation of high-level perspectives on M&A, public equity, private capital, and the capital markets. OBSERVATIONS Jan 2012 Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec WHAT’S INSIDE • Back from the Brink • A Lesson from Lehman • S&P 500 Companies Show Above-Average Credit Ratings Strength • Sector Snapshots and Performance Graphs • M&A and Private Capital Activity
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MARKET Monthly compilation of high-level perspectives on M&A, public equity, private capital, and the capital markets.
OBSERVATIONS
Jan 2012 Feb
Mar Apr
May Jun
Jul Aug
Sept Oct
Nov Dec
WHAT’S INSIDE • Back from the Brink • A Lesson from Lehman • S&P 500 Companies Show Above-Average Credit Ratings Strength • Sector Snapshots and Performance Graphs • M&A and Private Capital Activity
S&P Capital IQ Market Observations – February 2012 | Page 2 To learn more about S&P Capital IQ, please contact us at +1 212.438.8701 or [email protected]
S&P Capital IQ clients can access the M&A data contained in Market Observations, as well as export customizable versions of our charts from the S&P Capital IQ platform. Navigation Tip: S&P Capital IQ> Markets tab > Visualizations: Market Observations
With a new year unfolding and ‘past performance being no indicator of future success’, we welcome your continued input on content you would be interested in seeing in future issues of the MMO. This month, in addition to our regular content, two of our chief strategists offer contrasting perspectives for consideration. One, a rather convincing raft of wide-spread, positive indicators and an accompanying, nascent migration from capital preservation to growth strategies. The other, a cautionary tale of what we could expect if current market conditions turn out to be a red herring. You decide!
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TABLE OF CONTENTS
Back from the Brink (pg 4) S&P Capital IQ Global Equity Strategist Alec Young shows how the year-to-date global equity markets have shown a striking role reversal since 2011.
A Lesson from Lehman (pg 10) S&P Capital IQ’s Valuation Chief Equity Strategist Sam Stovall takes a look back at the tumultuous month of November.
S&P 500 Companies Show Above-Average Credit Ratings Strength (pg 12) Diane Vazza, Managing Director, and Evan Gunter, Associate, discuss companies in the S&P 500 that have strong credit profiles.
Sector Snapshots (pg 23) Consumer Discretionary Consumer Staples Energy Financials Healthcare Industrials Information Technology Materials Telecommunication Services Utilities
M&A and Private Capital Activity (pg 35) M&A Activity by Quarter M&A Valuations by Quarter M&A Valuations by Sector and Deal Size M&A by Sector LBOs by Sector PE Investments by Sector PIPE deals by Sector VC deals by Sector
S&P Capital IQ Market Observations – February 2012 | Page 4 To learn more about S&P Capital IQ, please contact us at +1 212.438.8701 or [email protected]
Global Equity Strategist, Alec Young Year-to-date global equity performance has been marked by a striking role reversal. Last year’s higher-beta, cyclical laggards have surged to the front of the pack as risk aversion has receded globally. Conversely, 2011’s defensive, counter-cyclical leaders have largely faded in the new-year. Specifically, after badly underperforming in 2011, developed international stocks are handily outperforming the S&P 500’s 5.4% gain with a 7.5% year-to-date advance (in USD). Even more surprising to most, Europe is beating the U.S., rising 7.5%, led by Germany’s 14.2% surge. Digging deeper, emerging market (EM) stocks have rebounded most, sporting an impressive 13.9% gain in the wake of last year’s 20.4% drubbing (see chart 1). Representing roughly 50% of the EM equity asset class, the BRIC nations are fueling the turnaround, rising 17% after last year’s 24.9% slide. Sector performance has been marked by a similar dynamic, with cyclical areas like Financials, Materials and Industrials surging to the front after trailing badly last year. Conversely, defensive sectors like Consumer Staples, Health Care and Telecom, last year’s stalwarts, have fallen to the wayside as risk aversion has dimmed in 2012 (see table 1). Not surprisingly, this stark performance shift has coincided with a dramatic decline in global equity volatility, as the bunker mentality that gripped investors in 2011 has receded. Trailing 60-day standard deviations for both developed and emerging market equities have declined to about 20 from readings in the mid 30s in early November. The standard deviations of both asset classes are now nearing their respective long-term averages in the high teens (see chart 2). Equity volatility has plunged in all major overseas markets, including Canada, Germany, the U.K., Japan, Australia, China, India, Brazil and Russia. Even France, Italy and Spain have gone along for the ride.
Chart 1.
Source: S&P Indices, MSCI (through 2/2 in USD)
BACK FROM THE BRINK
From Worst to First: Int'l. Equities Rebound YTD, Led By Emerging Mkts.
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S&P Capital IQ Market Observations – February 2012 | Page 5 To learn more about S&P Capital IQ, please contact us at +1 212.438.8701 or [email protected]
Table 1
Source: S&P Capital IQ, Bloomberg (through 2/2 in USD)
From Worst to First - After Lagging in 2011, Cyclicals Take the Lead
International Volatility Plummets Amid Improving Global Macro-Economic Environment
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Chart 2
Source: S&P Indices, MSCI (through 2/1 in USD)
S&P Capital IQ Market Observations – February 2012 | Page 6 To learn more about S&P Capital IQ, please contact us at +1 212.438.8701 or [email protected]
So what explains this across the board performance U-turn? We think several bullish factors are at work leading investors to once again favor “risk-on” assets at the expense of capital preservation strategies. Chief among them is a sharp decline in European sovereign stress thanks to aggressive ECB action to provide liquidity to European banks. Specifically, the ECB's Long Term Refinancing Operation (LTRO), which provides cheap, three-year bank loans, is allowing EU banks to meet a heavy first-half bond maturity burden, thereby buying time and reducing the odds of a Lehman-like shock, in our view. In addition, Spanish and Italian banks have exploited a carry trade - using cheap ECB funding to buy their nations' higher-yielding two-year bonds, pocketing the spread. As a result, short-term sovereign funding pressure has eased, with two-year Italian and Spanish bond yields tumbling to 3% and 2.5%, respectively, from north of 6% last fall (see chart 3). As such, risk assets like European and EM equities have rebounded sharply as investors' biggest worry - a global credit crunch emanating from Europe - has faded sharply, helping pull cautious money into cyclical assets, which have the most to gain from reduced credit stress. Adding fuel to the rebound in risk appetite - the stabilization in global manufacturing momentum, most notably in the U.S. (see chart 4) - has investors feeling more confident the world economy can weather a likely mild European recession.
BACK FROM THE BRINK
ECB Buys Time - Balance Sheet Expansion Lowers Sovereign Stress
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(%)(€,blns.)Chart 3
Source: S&P Capital IQ, Bloomberg (through 2/2 in USD)
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Chart 4
Source: IHS Global insight (as of 11/15)
BACK FROM THE BRINK
Global Manufacturing Stabilization Boosts Risk Appetite
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Source: S&P Capital IQ, Bloomberg (through 2/2 in USD)
Emerging markets have clearly been the stars of the show year-to-date, outperforming the S&P 500 and developed international equities by 850 bps and 640 bps, respectively. Easing inflation (see chart 5) has been the spark, in our view, as several months of falling prices have led key central banks to signal a greater willingness to ease monetary policy to revive slowing economic growth.
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BACK FROM THE BRINK
Fallling EM Inflation Sparks Easing, Boosting Equities
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*wholesale inflation
(%)
Chart 5
Lastly, we think attractive valuations have helped set the stage for 2012’s strong start. While low valuations alone rarely make assets rise, they help create the foundation for alpha once bullish catalysts emerge. After last year’s swoon, overseas stocks were priced for extremely negative macro economic outcomes ranging from a global credit crunch to a Chinese hard landing, by our analysis. As these risks have receded we think low valuations have made it easier for foreign stocks to snap back impressively. Even after the year-to-date bounce, developed and emerging market equities are trading at only 11.1X and 10.2X 12-month forward consensus EPS, respectively, both discounts to their long-term averages (see chart 6), giving us confidence the gains are sustainable even as the pace of the advance likely slows.
Source: S&P Capital IQ, Bloomberg
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Source: Bloomberg
BACK FROM THE BRINK
Low Valuations Boost Foreign Equities As Macro Catalysts Emerge
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Chart 6
Source: S&P Capital IQ, Bloomberg
S&P Capital IQ Market Observations – February 2012 | Page 10 To learn more about S&P Capital IQ, please contact us at +1 212.438.8701 or [email protected]
Source: Bloomberg
A LESSON FROM LEHMAN
A Lesson from Lehman, Sam Stovall If you asked investors what would be the worst luck for the global markets today, they would probably answer “The European sovereign debt crisis triggering a Lehman-like financial meltdown.” This answer should come as no surprise to most investors, as it has been a topic of debate for more than a year. And while the time and type of eventual conclusion to this crisis remains elusive, in our opinion, the quantifiable fallout from a worst-case scenario does not. Just step back a few years and revisit the latter months of 2008 during the peak period of panic, just before and immediately following the September 15 bankruptcy filing of Lehman Brothers.
Broad Indices % Chg. S&P 500 Sector % Chg.S&P 500 High Beta (48.8) Materials (42.4)NAREIT-Equity Only (47.5) Financials (39.8)S&P GSCI (46.5) Info. Technology (36.3)MSCI-Emerging Markets (44.6) Industrials (33.7)S&P MidCap 400 (36.6) Cons. Discretionary (32.6)MSCI-EAFE (35.3) S&P 500 (29.6)S&P SmallCap 600 (34.2) Energy (27.2)S&P Preferred Stock (30.2) Health Care (22.9)S&P 500 (29.6) Utilities (19.4)S&P 500 Low Volatility (19.3) Telecom. Services (14.6)S&P 500 Aristocrats (17.9) Cons. Staples (13.7)Barclays Aggregate (7.6)Source: S&P Capital IQ, MSCI, Bloomberg.Past performance is no guarantee of future results.
Benchmark and Sector Total Returns 8/31/08-11/30/08
During the fourth quarter of 2008, the S&P declined 22.6% in price, which was the worst quarterly price performance since the 23.2% drop during the fourth quarter of 1987. In addition, the “500” sequentially sank 9.1%, 16.9%, and 7.5% in price in September, October and November of that year, as the market anticipated, and then responded to, the Lehman collapse. During that three-month stretch, there was but one place to hide among global assets. Other than U.S Treasury bonds – the iShares Barclays 20+Year U.S. Treasury Bond Fund (TLT 119, NR) gained nearly 13% during those three months – 12 other global asset classes declined more than 7.6% on a total return basis.
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From a global equity perspective, the worst performer was the S&P 500 High Beta index, which fell 48.8% including dividends, followed by the MSCI-Emerging Markets Index (-44.6%), and the S&P MidCap 400 Index (-36.6%). Other S&P 500-related Indices held up better that the S&P 500 Index itself, which declined 29.6%. In particular, the S&P 500 Low Volatility Index dropped 19.3% while the S&P 500 Dividend Aristocrats slipped 17.9%. Other asset classes that took it on the chin in late 2008 included the NAREIT-Equity Only Index, which tumbled 47.5% including dividends, the S&P GSCI (a broad commodities benchmark), which slumped 46.5% and the S&P Preferred Stock Index that slid 30.2%. Only the Barclays Aggregate Bond Index declined less than 10%. At the risk of “piling on,” I remind you that all 10 sectors within the S&P 500 fell, even when including dividends. The worst performer was not Financials, which fell 39.8%, but Materials, which tumbled 42.4%. Financials started tumbling earlier in the year and, in our opinion, many probably thought that the demise of Lehman would trigger a global depression, thus undermining the demand for Materials by emerging market nations. The Technology (-36.3%), Industrials (-33.7%) and Consumer Discretionary (-32.6%) sectors were the other cyclical groups that fell more than the broad market. Not surprisingly, the defensive sectors held up better than the S&P 500, even though all five declined in total return. The Consumer Staples group fell the least (-13.7%), followed by Telecom Services (-14.6%), Utilities (-19.4%), Health Care (-22.9%) and Energy (-27.2%). Finally, since misery loves company, we see that 127 of the 130 sub-industries in the S&P 500 declined in price, from less than 10% for Distributors, Household Products, and HyperMarkets & Super Centers, to 80% or more for the Health Care Facilities, Industrial REITs, and Multi-line Insurance groups. The only sub-industries to rise in price from September through November 2008 were Brewers (+3.0%), Agricultural Products (+7.5%), and Education Services (+20.7%). I embarked on this little depressing look-back, not because we believe another Lehman-like event is likely, but because it can’t be dismissed. Indeed, we believe the overall picture in Europe has been improving, as encouraging demand for recent European sovereign debt auctions has buoyed investor optimism, while the low-cost ECB bank loans have lessened the risk of a credit crunch. The severity of the recession in Europe remains a wildcard. Our forecast is for a rough first half, followed by a slow uphill climb in the second half of this year. So there you have it. Should there be another Lehman-like meltdown, and you wish to use history as a guide (though it’s never gospel), I would suggest closing your eyes and preparing for a swift and severe sell-off in nearly all major asset classes, sectors and sub-industries, even with dividends added back. I would also venture to guess that you’ll probably be glad you didn’t sell your Treasuries.
A LESSON FROM LEHMAN
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Companies Show Above Average Credit Ratings Strength, Diane Vazza and Evan Gunter Companies within the S&P 500 index have strong credit measures, as the high proportion of investment-grade-rated entities demonstrates. Standard & Poor's Ratings Services rates 75% of S&P 500 companies investment grade ('BBB-' and higher) and 12% speculative grade ('BB+' and lower). By comparison, 49% of all U.S. companies that Standard & Poor's rates are investment grade. Debt is an important source of funding for many of the companies within in the S&P 500, which have $6.9 trillion in total debt, compared with $12.5 trillion in market capitalization (as of Jan. 31, 2012).The relative credit strength of the S&P 500 is not surprising considering that these are the largest companies in the U.S., and they typically have the greatest capacity to raise equity financing. The investment-grade companies represent 87% of the total market capitalization of the S&P 500 and 94% of its total debt. The industrials and utilities sectors have the strongest credit profiles relative to other sectors. Standard & Poor's rates 94% of companies in these sectors investment grade. The utilities sector has the highest potential for upgrades, as six companies (or 18.2%) in the sector have positive outlooks or ratings on CreditWatch positive. The telecommunication services sector is at the greatest risk of downgrades, with two of the rated companies (28.6%) with negative outlooks or ratings on CreditWatch negative. The financials sector has the most companies at risk of downgrades, with 15 (or 19.7%) that have negative outlooks or ratings on CreditWatch negative (see tables 5 and 6).
S&P 500 COMPANIES SHOW ABOVE AVERAGE CREDIT RATINGS STRENGTH
Table 1 Global Industry Classification Standard (GICS) Sector Distribution
Data as of January 31, 2012. Source: Standard & Poor's Global Fixed Income Research and S&P Capital IQ.
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Standard & Poor's credit ratings are opinions about credit risk, measured on a scale from 'AAA', for the strongest issuers, to 'D', which is reserved for issuers that have defaulted on financial commitments.
S&P 500 COMPANIES SHOW ABOVE AVERAGE CREDIT RATINGS STRENGTH
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Upgrade And Downgrade Risks Are Roughly Equal Across the entire S&P 500, 9% of companies are at the greatest risk of downgrades, and 8% are at the greatest risk of upgrades. We assign positive or negative outlooks to issuer ratings when we believe that an event or trend has at least a one-in-three likelihood of resulting in a rating action over the intermediate term for investment-grade entities (generally up to two years) and over the shorter term for speculative-grade entities (generally up to one year). Standard & Poor's places a rating on CreditWatch if there is at least a one-in-two likelihood of a rating change within 90 days. Although these numbers suggest that credit quality may decline in the near to medium term, the outlook for S&P 500 companies is less negative than that of the U.S. corporate sector as a whole, which has a negative bias of 13.5%, compared with a positive bias of just 7.6% at the end of January. Corporate funding costs rise considerably when moving down the ratings scale to speculative grade from investment grade. A broader mix of investors and institutions can buy and hold investment-grade bonds, so companies rated 'BBB-' and higher typically borrow at lower rates than speculative-grade-rated companies. At the end of January, U.S. corporate bonds rated 'BBB' had yields 1.7%-3.4% lower than the yields of bonds rated 'BB' (see chart 2). A few companies on the S&P 500 have the potential to move to investment grade from speculative grade, and vice versa. Zions Bancorp (BBB-/Negative/A-3) is a potential fallen angel, meaning that it's at risk of being downgraded to speculative grade from investment grade. On the other hand, four companies on the S&P 500 are potential rising stars, meaning Standard & Poor's could upgrade them to investment grade from speculative grade, which would likely lead to lower credit costs. These four companies are rated 'BB+' with positive outlooks: Wynn Resorts Ltd, Starwood Hotels & Resorts Worldwide Inc., Jabil Circuit Inc., and Harman International Industries Inc.
S&P 500 COMPANIES SHOW ABOVE AVERAGE CREDIT RATINGS STRENGTH
S&P Capital IQ Market Observations – February 2012 | Page 15 To learn more about S&P Capital IQ, please contact us at +1 212.438.8701 or [email protected]
Rating Count by RatingPositive Outlook or CreditWatch (count)
Data as of January 31, 2012. Source: Standard & Poor's Global Fixed Income Research and S&P Capital IQ.
Rated Companies On The S&P 500 Are Predominantly Investment Grade Although the majority of S&P 500 companies is investment grade, the ratings have declined since 2008, just as the ratings on most companies Standard & Poor's rates have declined. Within the S&P 500, the share of companies rated 'AA' or 'A' has declined to 32% from 37%, while the share of 'BBB' rated entities has increased to 41% from 36%. Despite this shift, the median rating has remained 'BBB+' for the S&P 500 companies--three notches higher than the median rating of 'BB+' for all rated U.S. companies.
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Chart 1
Distribution of S&P 500 Companies by Rating
Data as of January 31, 2012. Source: Standard & Poor's Global Fixed Income Research and S&P Capital IQ.
S&P 500 COMPANIES SHOW ABOVE AVERAGE CREDIT RATINGS STRENGTH
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As an alternative to looking at the distribution of ratings by number of companies, we also measured the distribution by market capitalization and total debt. Although 'BBB' rated companies outnumber any other rating category, companies rated 'A' dominate based on market capitalization and total debt. Companies rated in the 'A' category have a total market capitalization of $5.3 trillion and $4.4 trillion in total debt. Currently, 14% of the companies in the S&P 500 are unrated, up from 9% three years earlier. Because Standard & Poor's rated a higher proportion of the index three years ago, speculative-grade companies made up a larger percentage of the index (at 16%).
Chart 2
U.S. Financial and Nonfinancial Corporate Bond Yields by Rating Category
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28
AA
A
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BB
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(%)All OAS (option-adjusted spreads) are calculated off the reference five-year Treasury yield. 'AAA' rated entities are not shown owing to small sample size. Range width in each rating category represents the minimum and maximum points of corporate bond yields in the period Jan. 31, 2011- Jan. 31, 2012.Source: Standard & Poor's Global Fixed Income Research.
Current 5 yr Treasury
Yield
S&P 500 COMPANIES SHOW ABOVE AVERAGE CREDIT RATINGS STRENGTH
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Data as of January 31, 2012. Source: Standard & Poor's Global Fixed Income Research and S&P Capital IQ.
Total debt of the S&P 500 companies declined to $6.9 trillion at the end of 2011 from $9.5 trillion in 2007. As the debt level has declined, firms' cash holdings increased to $1.3 trillion from $1.1 trillion (see chart 3). As net debt, or debt minus cash, has declined, the ratio of net debt has fallen to 1.13x EBITDA from 1.55x in 2010. As this ratio decreases, it indicates increased credit strength. Meanwhile, debt remained relatively stable as a proportion of assets, at 0.31 (see chart 4).
S&P 500 COMPANIES SHOW ABOVE AVERAGE CREDIT RATINGS STRENGTH
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Chart 4
Credit Ratios of the S&P 500
Data as of December 31, 2011. Source: Standard & Poor's Global Fixed Income Research and S&P Capital IQ.
Data as of 12/31/2011. Excludes S&P 500 Companies from the financial sector, as well corporates with significant financial sector exposure. Note: Total Enterprise Value is not calculated for banks, brokers or financial services companies as most of the inputs used in a TEV calculation represent operating and not financial assets and liabilities for these companies. Source: Standard & Poor's Global Fixed Income Research & S&P Capital IQ.
S&P 500 COMPANIES SHOW ABOVE AVERAGE CREDIT RATINGS STRENGTH
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Table 4
Data as of January 31, 2012. Source: Standard & Poor's Global Fixed Income Research and S&P Capital IQ.
In terms of average credit measures and valuations for nonfinancial corporate entities, companies Standard & Poor's rates highly are larger, on average, both in terms of market capitalization and total enterprise value. Market capitalization to total enterprise values are closer together for higher-rated entities than they are for lower-rated ones. (Total enterprise value is the combined value of the firm's debt plus equity, minus cash and short-term investments.) Companies rated 'AAA' have higher market capitalization than total enterprise value, on average, because these entities tend to have a high levels of cash on the balance sheets or relatively low debt. In contrast, 'B' rated companies have an average total enterprise value that is more than double their average market capitalization. This shows these speculative-grade entities have higher proportions of debt relative to equity within their capital structures. Surprisingly, companies Standard & Poor's does not rate show many average credit measures comparable to those of 'AAA' rated entities. The companies that are not rated have debt to debt and equity and total debt to EBITDA that compare closely to the averages of 'AAA' companies. Partially, this is because of a selection bias. Some of the largest unrated companies within the S&P 500, such as Apple Inc, have strong equity financing, little to no debt, and strong cash reserves. Their credit measures are so strong because they have little need to raise debt financing, and they do not have bonds outstanding, so they may not have a credit rating from Standard & Poor's.
Constituents Name RatingMarket Cap
($ blns) Constituents Name RatingTotal Enterprise
Value ($ blns)Apple Inc. NR 425.6 General Electric Company AA+ 520.7
Exxon Mobil Corporation AAA 401.4 Exxon Mobil Corporation AAA 413.4Microsoft Corporation AAA 247.8 Apple Inc. NR 395.5International Business Machines Corp. A+ 223.4 Wal-Mart Stores Inc. AA 267.0
Wal-Mart Stores Inc. AA 210.1International Business Machines Corp. A+ 242.9
Chevron Corporation AA 205.4 AT&T, Inc. A- 236.1General Electric Company AA+ 197.5 Microsoft Corporation AAA 209.9Google Inc. AA- 188.6 Procter & Gamble Co. AA- 204.4Johnson & Johnson AAA 180.0 Verizon Communications Inc. A- 197.8AT&T, Inc. A- 174.3 Chevron Corporation AA 195.6
Top Ten Nonfinancial Companies Ranked by Market Capitalization and Total Enterprise Value
Data as of January 31, 2012. Note: Total Enterprise Value is not calculated for banks, brokers or financial services companies as most of the inputs used in a TEV calculation represent operating and not financial assets and liabilities for these companies. Source: Standard & Poor's Global Fixed Income Research & S&P Capital IQ.
S&P 500 COMPANIES SHOW ABOVE AVERAGE CREDIT RATINGS STRENGTH
S&P Capital IQ Market Observations – February 2012 | Page 20 To learn more about S&P Capital IQ, please contact us at +1 212.438.8701 or [email protected]
There are many ways to gauge the size of a company. For nonfinancials, we used market capitalization to rank companies by the size of their equity, and we used total enterprise value to rank them by a measure that combines debt with equity (see table 4). The top ten companies ranked by market capitalization compared with the top 10 ranked by total enterprise value have a lot of overlap and a few differences. Two of the companies from the top 10 by market capitalization, Johnson & Johnson and Google Inc., did not make it onto the top total enterprise value list. Both of these firms have holdings of cash and cash equivalents in the top 4% of S&P 500. In turn, Verizon Communications and Procter & Gamble Co. made the list of the top 10 total enterprise values but not the top 10 by market capitalization. A note on the methodology: we have used financial measures from S&P Capital IQ for the charts and tables within this report. In some cases, these measures may diverge from those Standard & Poor's Ratings Services uses. Standard & Poor's Ratings Services makes adjustments to company-reported financials according to its criteria. The S&P 500 is a large-cap index that is the most widely-followed measure of U.S. equity market performance and corporate profitability. (See www.standardandpoors.com for details of the S&P 500 index construction).
S&P 500 COMPANIES SHOW ABOVE AVERAGE CREDIT RATINGS STRENGTH
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Table 5
Company Sector Rating Outlook / CreditWatchAbbott Laboratories Healthcare AA CreditWatch NegativeConocoPhillips Energy A CreditWatch NegativeTyco International Ltd. Industrials A- CreditWatch NegativeComputer Sciences Corporation Information Technology BBB+ CreditWatch NegativeNews Corp. Consumer Discretionary BBB+ CreditWatch NegativeMurphy Oil Corporation Energy BBB CreditWatch NegativeSunoco, Inc. Energy BB+ CreditWatch NegativeBerkshire Hathaway Inc. Financials AA+ Negative OutlookCME Group Inc. Financials AA Negative OutlookMedtronic, Inc. Healthcare AA- Negative OutlookState Street Corp. Financials A+ Negative OutlookThe Bank of New York Mellon Corporation Financials A+ Negative OutlookWells Fargo & Company Financials A+ Negative OutlookHalliburton Company Energy A Negative OutlookUnited Technologies Corp. Industrials A Negative OutlookWalgreen Co. Consumer Staples A Negative OutlookAFLAC Inc. Financials A- Negative OutlookBank of America Corporation Financials A- Negative OutlookCitigroup, Inc. Financials A- Negative OutlookLowe's Companies Inc. Consumer Discretionary A- Negative OutlookMetLife, Inc. Financials A- Negative OutlookMorgan Stanley Financials A- Negative OutlookThe Allstate Corporation Financials A- Negative OutlookThe Goldman Sachs Group, Inc. Financials A- Negative OutlookV.F. Corporation Consumer Discretionary A- Negative OutlookAvon Products Inc. Consumer Staples BBB+ Negative OutlookDENTSPLY International Inc. Healthcare BBB+ Negative OutlookExpress Scripts Inc. Healthcare BBB+ Negative OutlookHospira Inc. Healthcare BBB+ Negative OutlookBig Lots Inc. Consumer Discretionary BBB Negative OutlookCapital One Financial Corp. Financials BBB Negative OutlookEntergy Corporation Utilities BBB Negative OutlookGenworth Financial Inc. Financials BBB Negative OutlookH&R Block, Inc. Consumer Discretionary BBB Negative OutlookZions Bancorp. Financials BBB- Negative OutlookOwens-Illinois, Inc. Materials BB+ Negative OutlookR.R. Donnelley & Sons Company Industrials BB+ Negative OutlookAlpha Natural Resources, Inc. Energy BB Negative OutlookFrontier Communications Corporation Telecommunication Services BB Negative OutlookIron Mountain Inc. Industrials BB- Negative OutlookNRG Energy, Inc. Utilities BB- Negative OutlookPulteGroup, Inc. Consumer Discretionary BB- Negative OutlookDean Foods Company Consumer Staples B+ Negative OutlookSprint Nextel Corp. Telecommunication Services B+ Negative OutlookSUPERVALU Inc. Consumer Staples B+ Negative OutlookSears Holdings Corporation Consumer Discretionary CCC+ Negative Outlook
Potential Downgrades of the S&P 500
Data as of January 31, 2012. Source: Standard & Poor's Global Fixed Income Research & S&P Capital IQ.
S&P 500 COMPANIES SHOW ABOVE AVERAGE CREDIT RATINGS STRENGTH
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Table 6 Potential Upgrades of the S&P 500
Company Sector Rating Outlook / CreditWatchNYSE Euronext, Inc. Financials A+ CreditWatch PositiveOracle Corporation Information Technology A CreditWatch PositiveGoodrich Corp. Industrials BBB+ CreditWatch PositiveNortheast Utilities Utilities BBB+ CreditWatch PositiveProgress Energy Inc. Utilities BBB+ CreditWatch PositiveConstellation Energy Group, Inc. Utilities BBB- CreditWatch PositiveRoper Industries Inc. Industrials BBB- CreditWatch PositiveWilliams Companies, Inc. Energy BBB- CreditWatch PositiveVulcan Materials Company Materials BB CreditWatch PositiveAdvanced Micro Devices, Inc. Information Technology B+ CreditWatch PositiveThe Coca-Cola Company Consumer Staples A+ Positive OutlookUnitedhealth Group, Inc. Healthcare A- Positive OutlookKeyCorp Financials BBB+ Positive OutlookAssurant Inc. Financials BBB Positive OutlookAvery Dennison Corporation Industrials BBB Positive OutlookBemis Company, Inc. Materials BBB Positive OutlookFifth Third Bancorp Financials BBB Positive OutlookHCP, Inc. Financials BBB Positive OutlookLife Technologies Corporation Healthcare BBB Positive OutlookMead Johnson Nutrition Company Consumer Staples BBB Positive OutlookPall Corp. Industrials BBB Positive OutlookPinnacle West Capital Corporation Utilities BBB Positive OutlookPrincipal Financial Group Inc. Financials BBB Positive OutlookPublic Service Enterprise Group Inc. Utilities BBB Positive OutlookTE Connectivity Ltd. Information Technology BBB Positive OutlookAllegheny Technologies Inc. Materials BBB- PositiveAmeren Corporation Utilities BBB- Positive OutlookHealth Care REIT, Inc. Financials BBB- Positive OutlookMolson Coors Brewing Company Consumer Staples BBB- Positive Outlookpriceline.com Incorporated Consumer Discretionary BBB- Positive OutlookTyson Foods Inc. Consumer Staples BBB- Positive OutlookUnum Group Financials BBB- Positive OutlookYum! Brands, Inc. Consumer Discretionary BBB- Positive OutlookHarman International Industries Inc. Consumer Discretionary BB+ Positive OutlookJabil Circuit Inc. Information Technology BB+ Positive OutlookStarwood Hotels & Resorts Worldwide Inc. Consumer Discretionary BB+ Positive OutlookWynn Resorts Ltd. Consumer Discretionary BB+ Positive OutlookCONSOL Energy Inc. Energy BB Positive Outlook
Data as of January 31, 2012. Source: Standard & Poor's Global Fixed Income Research & S&P Capital IQ.
S&P 500 COMPANIES SHOW ABOVE AVERAGE CREDIT RATINGS STRENGTH
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SECTOR SNAPSHOTS
Sector Snapshots S&P Capital IQ and S&P Indices collaborated to produce these monthly performance views for the top ten sectors of the S&P 500.
Market Observations Covering Consumer Discretionary Consumer Staples Energy Financials Healthcare Industrials Information Technology Materials Telecommunications Utilities
Industry Specific Data S&P Capital IQ uses the Global Industry Classification Standard (GICS®) to categorize and tag all companies within our database. We also collect industry specific and supplemental data for 16 industries, including Airlines, Banks, Healthcare, Hotels and Gaming, Insurance, Metals and Mining, Oil and Gas, Retail, Semiconductors, and Telecom, Cable, and Wireless. To learn more about GICS® or our industry specific and supplemental data items please contact [email protected]
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CONSUMER DISCRETIONARY SECTOR SNAPSHOT
Equities | U.S.
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CONSUMER STAPLES SECTOR SNAPSHOT
Equities | U.S.
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ENERGY SECTOR SNAPSHOT
Equities | U.S.
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FINANCIALS SECTOR SNAPSHOT
Equities | U.S.
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HEALTHCARE SECTOR SNAPSHOT
Equities | U.S.
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INDUSTRIALS SECTOR SNAPSHOT
Equities | U.S.
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INFORMATION TECHNOLOGY SECTOR SNAPSHOT
Equities | U.S.
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MATERIALS SECTOR SNAPSHOT
Equities | U.S.
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TELECOMMUNICATION SERVICES SECTOR SNAPSHOT
Equities | U.S.
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UTILITIES SECTOR SNAPSHOT
Equities | U.S.
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M&A MARKET
Our Transaction Data S&P Capital IQ covers 1,300,000+ transactions globally. All transaction information is seamlessly integrated in the S&P Capital IQ platform and S&P Capital IQ Excel Plug-In, and can be viewed alongside the most accurate company fundamentals. To learn more about our transaction coverage, history, and collection process contact [email protected].
M&A Market S&P Capital IQ provides detailed information on M&A and financing transactions covering the most active markets in the world. We track all publicly announced mergers, acquisitions, private placements, public offerings, shelf registrations, equity buybacks, and bankruptcies. Transaction data is updated daily from various sources such as regulatory filings, company websites, newsletters, trade publications, and press releases.
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Notes: Figures are based on announce dates and on a trailing three months basis through September 30, 2011. Includes both closed and pending transactions as well as those without transaction values.
Strategic vs. Financial Buyer M&A (North American Targets)
Strategic vs. Financial Buyer M&A (European Targets)
M&A ACTIVITY BY QUARTER
Transactions | North America and Europe
Source: S&P Capital IQ
Source: S&P Capital IQ
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Notes: Includes M&A transactions involving US and Canadian targets where relevant financials were available to calculate EBITDA and Net Income valuation multiples. Figures are based announce dates on a trailing three months basis through September 30, 2011. Includes both closed and pending transactions.
Median Enterprise Value / EBITDA
Median Enterprise Value / LTM Net Income
M&A ACTIVITY BY QUARTER (NORTH AMERICA)
Transactions | North America and Europe
Source: S&P Capital IQ
Source: S&P Capital IQ
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Notes: Includes M&A transactions involving European targets where relevant financials were available to calculate EBITDA and Net Income valuation multiples. Figures are based on announce dates on a trailing three months basis through September 30, 2011. Includes both closed and pending transactions.
Median Enterprise Value / EBITDA
Median Equity Value / LTM Net Income
M&A ACTIVITY BY QUARTER (EUROPE)
Transactions | Europe
Source: S&P Capital IQ
Source: S&P Capital IQ
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Notes: Figures are based on transaction announce dates. Includes both closed and pending transactions. N/A = Not available. N/M = Not made.
M&A VALUATION BY SECTOR AND DEAL SIZE-NORTH AMERICA
Transactions | North America
Source: S&P Capital IQ
Source: S&P Capital IQ
Median Implied Enterprise Value / EBITDA (North American Targets)
(As of 1/31/12) Last Twelve Months Ending January 31st of:2008 2009 2010 2011 2012
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Notes: Figures are based on transaction announce dates. Includes both closed and pending transactions. N/A = Not available. N/M = Not made.
M&A VALUATION BY SECTOR AND DEAL SIZE-EUROPE
Transactions | Europe
Source: S&P Capital IQ
Source: S&P Capital IQ
Median Implied Enterprise Value / EBITDA (European Targets)
(As of 1/31/12) Last Twelve Months Ending January 31st of:2008 2009 2010 2011 2012
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Notes: Figures are based on transaction announce dates. Includes both closed and pending transactions as well as those without transaction values.
M&A ACTIVITY BY SECTOR
Transactions | North America and Europe
Source: S&P Capital IQ
North American Target M&A
(As of 1/31/12) Last Twelve Months Ending January 31st of:2008 2009 2010 2011 2012
Sector # of Deals Value ($mil) # of Deals Value ($mil) # of Deals Value ($mil) # of Deals Value ($mil) # of Deals Value ($mil)
Grand Total 18,485 $ 1,556,599 15,812 $ 771,901 13,263 $ 555,149 16,110 $ 660,474 16,605 $ 684,507
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Notes: Figures are based on transaction announce dates. Includes both closed and pending transactions as well as those without transaction values.
LEVERAGE BUYOUTS BY SECTOR
Transactions | North America and Europe
Source: S&P Capital IQ
North American Target Leveraged Buyouts
(As of 1/31/12) Last Twelve Months Ending January 31st of:2008 2009 2010 2011 2012
Sector
# of Deals Value ($mil) # of Deals Value ($mil) # of Deals Value ($mil) # of Deals Value ($mil) # of Deals Value ($mil)
Grand Total 2,355 $ 241,327 2,098 $ 103,032 1,598 $ 76,835 1,921 $ 72,885 1,777 $ 96,340
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Notes: Figures are based on transaction announce dates. Includes both closed and pending transactions as well as those without transaction values.
STRATEGIC M&A BY SECTOR
Transactions | North America and Europe
Source: S&P Capital IQ
North American Target Strategic M&A
(As of 1/31/12) Last Twelve Months Ending January 31st of:2008 2009 2010 2011 2012
Sector # of Deals Value ($mil) # of Deals Value ($mil) # of Deals Value ($mil) # of Deals Value ($mil) # of Deals Value ($mil)
Grand Total 16,130 $ 1,315,272 13,714 668,869 11,665 $ 478,314 14,189 $ 587,589 14,828 $ 588,167
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Notes: Figures are based on transaction announce dates. Includes both closed and pending transactions as well as those without transaction values.
PRIVATE EQUITY INVESTMENTS BY SECTOR (NON-BUYOUTS)
Transactions | North America and Europe
Source: S&P Capital IQ
North American Target Private Equity Investments
(As of 1/31/12) Last Twelve Months Ending January 31st of:2008 2009 2010 2011 2012
Grand Total 514 36,829 616 $ 81,898 950 $ 91,009 1,414 $ 176,745 1,302 $ 94,813
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Notes: Figures are based on transaction announce dates. Includes both closed and pending transactions as well as those without transaction values.
PRIVATE EQUITY INVESTMENTS IN PUBLIC ENTITIES BY SECTOR
Transactions | North America and Europe
Source: S&P Capital IQ
North American Target PIPEs
(As of 1/31/12) Last Twelve Months Ending January 31st of:2008 2009 2010 2011 2012
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Notes: Figures are based on transaction announce dates. Includes both closed and pending transactions as well as those without transaction values.
VENTURE CAPITAL INVESTMENTS BY SECTOR
Transactions | North America and Europe
Source: S&P Capital IQ
North American Target Venture Capital
(As of 1/31/12) Last Twelve Months Ending January 31st of:2008 2009 2010 2011 2012
Sector # of Deals Value ($mil) # of Deals Value ($mil) # of Deals Value ($mil) # of Deals Value ($mil) # of Deals Value ($mil)
Grand Total 2,145 13,314$ 2,059 17,202$ 1,742 28,919$ 2,245 28,842$ 2,202 43,399$
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CONTACT US
About S&P Capital IQ Market Observations Market Observations is a monthly compilation of high-level perspectives on M&A, public equity, private capital, and the capital markets. Market Observations is primarily based on S&P Capital IQ’s public company, private company, and private equity information, and includes expert commentary from Standard & Poor’s Equity and Fixed Income Research. S&P Capital IQ is a Standard & Poor’s business, and provides the most accurate and timely financial information to investment banks, asset management firms, private equity firms, and corporations around the world. Learn more at www.capitaliq.com.
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DISCLOSURES
S&P STARS - Since January 1, 1987, S&P Capital IQ Equity Research has ranked a universe of U.S. common stocks, ADRs (American Depositary Receipts), and ADSs (American Depositary Shares) based on a given equity’s potential for future performance. Similarly, S&P Capital IQ Equity Research has used STARS® methodology to rank Asian and European equities since June 30, 2002. Under proprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank equities according to their individual forecast of an equity’s future total return potential versus the expected total return of a relevant benchmark (e.g., a regional index (S&P Asia 50 Index, S&P Europe 350® Index or S&P 500® Index)), based on a 12-month time horizon. STARS was designed to meet the needs of investors looking to put their investment decisions in perspective. Data used to assist in determining the STARS ranking may be the result of the analyst’s own models as well as internal proprietary models resulting from dynamic data inputs. S&P Quality Rankings (also known as S&P Earnings & Dividend Rankings)- Growth and stability of earnings and dividends are deemed key elements in establishing S&P’s earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings: A+ Highest B- Lower A High C Lowest A- Above Average D In Reorganization B+ Average NR Not Ranked B Below Average
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DISCLOSURES
S&P Issuer Credit Rating - A Standard & Poor’s Issuer Credit Rating is a current opinion of an obligor’s overall financial capacity (its creditworthiness) to pay its financial obligations. This opinion focuses on the obligor’s capacity and willingness to meet its financial commitments as they come due. It does not apply to any specific financial obligation, as it does not take into account the nature of and provisions of the obligation, its standing in bankruptcy or liquidation, statutory preferences, or the legality and enforceability of the obligation. In addition, it does not take into account the creditworthiness of the guarantors, insurers, or other forms of credit enhancement on the obligation. S&P Capital IQ EPS Estimates – S&P Capital IQ earnings per share (EPS) estimates reflect analyst projections of future EPS from continuing operations, and generally exclude various items that are viewed as special, non-recurring, or extraordinary. Also, S&P Capital IQ EPS estimates reflect either forecasts of S&P Capital IQ equity analysts; or, the consensus (average) EPS estimate, which are independently compiled by Capital IQ, a data provider to S&P Capital IQ Equity Research. Among the items typically excluded from EPS estimates are asset sale gains; impairment, restructuring or merger-related charges; legal and insurance settlements; in process research and development expenses; gains or losses on the extinguishment of debt; the cumulative effect of accounting changes; and earnings related to operations that have been classified by the company as discontinued. The inclusion of some items, such as stock option expense and recurring types of other charges, may vary, and depend on such factors as industry practice, analyst judgment, and the extent to which some types of data is disclosed by companies. S&P Core Earnings – S&P Capital IQ Core Earnings is a uniform methodology for adjusting operating earnings by focusing on a company's after-tax earnings generated from its principal businesses. Included in the S&P Capital IQ definition are employee stock option grant expenses, pension costs, restructuring charges from ongoing operations, write-downs of depreciable or amortizable operating assets, purchased research and development, M&A related expenses and unrealized gains/losses from hedging activities. Excluded from the definition are pension gains, impairment of goodwill charges, gains or losses from asset sales, reversal of prior-year charges and provision from litigation or insurance Settlements.
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DISCLOSURES
S&P 12 Month Target Price – The S&P Capital IQ equity analyst’s projection of the market price a given security will command 12 months hence, based on a combination of intrinsic, relative, and private market valuation metrics, including S&P Fair Value. S&P Capital IQ Equity Research – S&P Capital IQ Equity Research U.S. includes Standard & Poor’s Investment Advisory Services LLC; Standard & Poor’s Equity Research Services Europe includes McGraw-Hill Financial Research Europe Limited trading as Standard & Poor’s; Standard & Poor’s Equity Research Services Asia includes Standard & Poor’s LLC’s offices in Singapore, Standard & Poor’s Investment Advisory Services (HK) Limited in Hong Kong, Standard & Poor’s Malaysia Sdn Bhd, and Standard & Poor’s Information Services (Australia) Pty Ltd. Abbreviations Used in S&P Capital IQ Equity Research Reports CAGR- Compound Annual Growth Rate CAPEX- Capital Expenditures CY- Calendar Year DCF- Discounted Cash Flow EBIT- Earnings Before Interest and Taxes EBITDA- Earnings Before Interest, Taxes, Depreciation and Amortization EPS- Earnings Per Share EV- Enterprise Value FCF- Free Cash Flow FFO- Funds From Operations FY- Fiscal Year P/E- Price/Earnings PEG Ratio- P/E-to-Growth Ratio PV- Present Value R&D- Research & Development ROE- Return on Equity ROI- Return on Investment ROIC- Return on Invested Capital ROA- Return on Assets SG&A- Selling, General & Administrative Expenses WACC- Weighted Average Cost of Capital Dividends on American Depository Receipts (ADRs) and American Depository.