RBC urges caution despite rate cut

DENVER – A new RBC Capital Markets report cautions investors with regards to leisure stocks saying its research indicates signs of incremental sales weakness in nearly all leisure product categories and that near-term fundamental improvement is “unlikely.”

“We continue to advise patience with leisure stocks.” RBC wrote. “Rate cuts have placed a bid on certain consumer discretionary stocks in our coverage. Although history suggests that rate cuts lead to improved absolute and relative performance within 6-12 months, we believe it is premature to bet on a cyclical recovery.”

The company listed several reasons to support that conclusion in addition to the sales weakness, including:

  • Results from the RBC CASH (Consumer Attitudes and Spending by Household) survey (conducted 2/4-2/6) shows that consumer confidence weakened further in the past month, and that consumers are less inclined to spend money on big-ticket items. Twenty-two percent of consumers said that they are more likely to make sure a purchase now vs. six months ago, down from 28 percent last month and 32 percent last February.
  • Tightening credit could continue to crimp demand. Credit is still available for quality borrowers, but banks have “clearly tightened” as a result if higher loss rates. RBC says checks indicate that lower financing volumes are not only attributable to fewer loan applications, but also to lower approval rates.
  • ”We question how much of the interest rate stimulus will flow through to the consumer. Banks have been slow to pass through lower interest rates because: 1) loss rates are accelerating, and 2) spreads were quite thin before the Fed started cutting rates. We estimate that rates in the RV and marine industries have come down by 50-75 basis points since the Fed first started to cut rates. Meanwhile, interest rates charged by Harley-Davidson's finance division, HDFS, have not changed at all due to worsening delinquency and loss metrics.”
  • Higher debt levels could limit the impact of rate cuts on consumer durables spending. “It is worth considering that debt levels are higher than in the past, both on an absolute basis and relative to disposable income. Consumers' capacity to take on additional debt has been closely tied to growth in recreational products spending over the years. We do not know where the limits lie in terms of consumer debt capacity, but history has shown a propensity for consumers to replenish their savings after periods of financial stress.”
  • “Not much about this cycle has been ‘normal,’” RBC wrote. “Although every cycle is different, the current downturn has been particularly anomalous in that: 1) the sector was in full blown recession before any significant economic weakness emerged; and 2) this downturn coincided with a major housing recession and a strained financial system, which we have not seen in prior cycles.”

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