Through the Cycle - IBISWorld

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16 contracted more than 10% during the recession, but seems to be on the uptick. Garbage in, garbage out, so this group emerges from recessions without much volatility. • Educational and health care services: These services tend to be stable historically. However, government budget constraints, together with the cautious discretionary spending patterns of households, are complicating attempts to rank lending opportunities in these important areas. • Arts, entertainment, and recreation and Accommodation and food services: These two industry sectors mirror GDP performance in recovery years, which doesn’t augur well in an iffy economic climate. They declined precipitously during the Great Recession (9.4% and 14.6%, respectively). Some Selected Opportunities Agriculture and Forestry Many banks have a long history of lending successfully to this sector despite its volatility. Some notable areas going forward are shown in Table 2. Table 2 Industry (5-Digit NAICS) Agriculture a Safe Bet, with Some Strong Lending Opportunities Revenue 2011 MM$ 5-Year Average Growth 2011-15 Soybean, oilseed, and corn farming may continue to benefit from government policies to support renewable energy sources. However, an article on alternative energy in the September 2011 Journal 5 pointed out that biofuels are not cost effective without government support. Nonetheless, economic recovery will buttress farm prices. As for soybeans and corn, depleted stocks suggest firm prices through 2012, which could spill over to other basic commodities. Generally, high capital requirements indicate a strong capacity to borrow further, enhancing the allure of this sector. Riding the wave of the trend to outsource, excellent opportunities can be found in agriculture and forestry support services in this capital-hungry group. Energy and Utilities An article in the July–August 2011 Journal 6 addressed opportunities and risks associated with exposure to the natural December 2011–January 2012 The RMA Journal Capital Intensity Dairy farms 33,500 2.3% High Forest support services 2,230 3.6% Medium Soybean farming 29,789 1.1% High Oilseed farming 867 3.9% High Corn farming 72,063 3.4% High Cotton farming 11,453 1.3% High Chicken & turkey meat production 27,940 1.5% High Crop services 13,671 3.3% High Livestock production support 4,821 2.6% Medium Timber services 1,043 2.9% High Source: IBISWorld, Inc. gas supply chain. One bright area singled out was smallscale gas exploration and production, where lending would range between $5 million and $50 million. To be sure, care must be taken when accessing plans in this arena. As the September Journal article points out, there is a clear disparity between firms that generate alternative energy and those that manufacture equipment. One case in point is solar power providers, an emerging industry that made our short list in Table 3. In contrast, solar panel producers face adverse competition from low-cost producers overseas, such as China. The recent bankruptcy of government-supported solar panel manufacturer Solyndra underscores this risk. Table 3 Industry (5-Digit NAICS) Energy and Utilities: Strong Growth and Borrowing Appetite Revenue 2011 MM$ 5-Year Average Growth 2011-15 Capital Intensity Solar power 79 7.9% High Water supply & irrigation Sewage treatment facilities 59,995 3.5% High 41,587 1.8% High Source: IBISWorld, Inc. Construction Despite record-low interest rates, housing remains in the doldrums and commercial real estate is a nonstarter at this juncture. As analyzed in a July 2011 IBISWorld special report, 7 public works projects are likely to experience heavy cuts as the government retreats from the free-spending days of the ARRA. For the longer term, we are more bullish on the residential side. Household formation, a leading driver of growth, is still robust. When the U.S. finally achieves sustained GDP growth and job creation, home builders and hired contractors will benefit, and there is a grand upside here as housing starts have been at dreadfully low levels for more than four years. The $64,000 question is when a revival will take place (Table 4). Table 4 Industry (5-Digit NAICS) Construction’s Bright Spots Revenue 2011 MM$ 5-Year Average Growth 2011-15 Capital Intensity Water well drilling 4,704 4.2% Medium Oil & gas pipeline construction Road & highway maintenance 38,880 5.0% Medium 46,000 3.0% Medium Excavators 25,475 5.3% Medium Demolition & wrecking 4,478 4.9% Medium Source: IBISWorld, Inc. Manufacturing There are some gold nuggets in manufacturing and, hopefully, we hit some highlights in our December 2009 article,
particularly in the areas of biotechnology and nanomaterials. A distilled version of our current research is found in Table 5. We are cautiously optimistic for the mature auto industry given restructuring and pent-up demand. By August 2011, car sales were up 9.3% from a year earlier, spurred by a 15.5% jump in purchases of small vehicles. Growth for light trucks was in double digits as well. GM, Ford, and Chrysler all gained market share, mainly at the expense of Toyota and Honda. Despite the “cash for clunkers” tax break, the average age of cars on the road peaked in 2010 at 8.8 years. So as Americans retire their personal vehicles and replace their business fleets, mostly with small cars and light trucks, many banks’ vehicle financing portfolios will put the pedal to the metal and enjoy some fast growth! Table 5 Industry (5-Digit NAICS) American Manufacturing Still Has Some Life in Its Legs Revenue 2011 MM$ 5-Year Average Growth 2011-15 Capital Intensity Biotechnology 92,396 9.6% Medium Mining, oil & gas machinery manufacturing Medical instrument & supply manufacturing 19,588 4.9% Medium 100,802 4.4% Medium Tortilla production 3,031 3.6% Medium Wineries 15,920 5.2% Medium Vitamin & supplement manufacturing Automobile engine & parts manufacturing 27,855 4.5% High 25,413 3.4% High Distilleries 6,937 4.1% High Generic pharmaceutical manufacturing Medical device manufacturing Wire & cable manufacturing 48,844 7.3% High 60,243 6.4% Medium 17,827 5.8% Medium Source: IBISWorld, Inc. The Information Sector What a morass! This broad sector is so diverse and is becoming so integrated with other business lines that the lines of NAICS definitions are blurring. Nevertheless, the sector’s divergent prospects merit some attention. Obviously, this sector is riding the roller coaster of the digital revolution. Traditional publishing is in decay, content industries are seeking new distribution channels, and technologically advanced companies are looking to further leverage their infrastructure to maximize returns. While print media get taken for a ride, information gatherers are finding other thrill-ride channels. Table 6 lists a selection of the few promising potential growth segments presenting low risk. Business Services The professional and business services sector usually plods Table 6 Industry (5-Digit NAICS) Information’s Sweet Spots Revenue 2011 MM$ 5-Year Average Growth 2011-15 Capital Intensity Software publishing 156,317 2.5% Low Database, storage & backup software publishing Business analytics & enterprise software publishing 23,917 4.3% Low 23,917 5.4% Low Cable networks 16,742 3.0% Low Cable, Internet & telephone providers Wireless telecommunications carriers 133,359 6.4% Medium 204,437 3.2% High News syndicates 2,535 2.2% Medium Internet service providers 43,100 6.0% High Voice over Internet protocol 14,116 17.4% High Search engines 24,485 3.8% Medium Internet publishing & broadcasting along with relatively slow but stable growth. Many industries in this group are relatively secure and should do nicely even in a gradual recovery. Business outsourcing, as noted in our December 2009 RMA Journal article, will support traditional opportunities including: • Law firms. • Accounting, tax, bookkeeping, and payroll services. • Engineering services. • Scientific research and development. • Debt collection agencies. • Security, burglar, and fire alarm services. Another group of niche industries, listed in Table 7, is poised in a growth mode and providing safe, solid returns. Table 7 Industry (5-Digit NAICS) Laboratory testing services 38,694 6.8% High Business and Administrative Services on the Rise Revenue 2011 MM$ 5-Year Average Growth 2011-15 Source: IBISWorld, Inc. Capital Intensity 16,277 5.2% Medium Environmental consulting 19,084 9.4% Low Scientific & economic consulting 23,693 3.8% Low Veterinary services 29,317 3.8% Low Human resources & benefits administration 56,467 4.2% Low Correctional facilities 36,242 7.5% Low Credit bureaus & rating agencies 9,159 7.8% Medium Pest control 10,568 5.6% Low Landscaping services 59,205 3.7% Low Packaging & labeling services 8,395 5.1% Medium Recycling facilities 4,598 7.7% High Source: IBISWorld, Inc. The RMA Journal December 2011–January 2012 17
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