Rural Stocks and Economy Show Weakness

Commodity prices are stagnant — and crummy credit markets and bad investments may lead to the sale of rural non-profit hospitals.

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The stocks of publicly traded companies dropped sharply in October, after reaching 2009 highs —and the companies doing much of their business in rural America saw their shares fall the most.

The Daily Yonder 40 index — 40 stocks picked to reflect the rural economy — fell 7 percentage points from a mid-October high. The Dow Industrials dropped 3 points and the Standard and Poor’s 500 fell about 5 points.

Rural companies and products are particularly unsettled now, even as the latest economic reports show a national economy that grew in the third quarter of 2009.

But is that growth sustainable? A sobering view comes from the retail sector, where firms like Costco and Target are upping sales by now accepting food stamps. Costco is the latest big retailer to begin taking stamps instead of cash. Sam’s Club started late last year. Family Dollar Stores, a Yonder 40 stalwart, has been taking food stamps for years and last year posted record profits.

One definition of a weak economy is when you depend on food stamps for your profits.

As the chart above shows, the rural stock index still leads the other major equity indices since the beginning of the year. The Yonder 40 is up 21% in ’09; the Dow has risen 11% and the S&P 500 is up 15%. (The only major index to beat the Yonder 40 is the NASDAQ, which has gained nearly 30% this year.) And since the Yonder 40 began in July 2007, it leads the Dow, the NASDAQ and the S&P.

Still, the businesses that make up the Yonder 40 — and thus reflect the rural economy — show new weaknesses this month.

The prices for many commodities are still stagnant. Andersons is down because of lower prices paid for fertilizer. Coal and oil companies have suffered from declines in the prices for their products. Coal prices were particularly high last year, but the prices have slumped this year and the average coal firm has seen its stock drop 8% since March, a period when the rest of the market was soaring. Meanwhile, coal inventories are at record high, further reducing demand. Oil companies have also slumped on lower crude oil prices.

Plumb Creek Timber saw its profits drop 72% in the latest quarter as a moribund construction industry bought less lumber. Bassett, the furniture maker, is closing a fiberboard facility in Bassett, Virginia, that has been in production since 1970. The shutdown will idle 45 workers.

A slowed industrial sector has even reduced the demand for electricity, leaving the utility giant Southern Co. with a negligible rise in its third quarter profits. Electric demand from the steel-making industries in Southern’s region is down 36% from a year ago.

“The question is whether consumer demand and employment are real. That’s what drives the economy,” Southern CEO David Ratcliffe told The Wall Street Journal. “We probably won’t know whether we’ve really bottomed out until the first quarter of next year.”

It’s hard to find a bright spot. One would think that increased federal stimulus spending would be good for road builders, like Astec Industries. But that stock has dropped 6.6% this month. (See below for how all the Yonder 40 fared in October 2009.) The company said that soft real estate markets are slowing business — and that the failure of Congress to renew the highway bill is hurting its roadbuilding business.

Even Sturm Ruger is down nearly 14% this month. The gunmaker’s stock price has been soaring since the election of Barack Obama, which set off a gun-buying stampede among those who thought the new administration would strengthen gun laws.

Bright spots? Hog prices are up, although that doesn’t mean hog raisers will pocket much of the cash. The railroads see an economic recovery in the making. They carry much of what’s made in rural America to the cities and although all the big roads saw double-digit profit declines in the third quarter, they are also optimistic.

Deere recalled 452 workers to its farm machinery plant in Ottumwa, Iowa. They’ll start making balers, windrowers, mower-conditioners and forage harvesters in late November.

Finally, the Yonder wonders how this economic downturn will permanently change the rural economy. Here’s one inkling.

The Wall Street Journal reports that tight credit markets and investment losses among non-profit endowments could bring big changes in the hospital business. The paper reports that investor-owned hospital groups could buy a number of non-profit hospitals that have been damaged by the economy. 

Standard & Poor’s has lowered debt ratings for 107 non-profit hospitals or health systems. These economic pressures, analysts say, could force the sale of non-profit hospitals to for-profit groups. One of the investor-owned hospital chains expected to benefit from this consolidation is LifePoint Hospitals, which specializes in rural hospitals. LifePoint’s CFO said recently that non-profit hospital woes have created “an opportunity over the next 12 to 18 months to really see more acquisitions coming through the pipeline.”

Below is a chart showing how the entire Yonder 40 list of stocks did during October 2009.

The Daily Yonder

 

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