How Japan crisis is affecting U.S. business - East Valley Tribune: Business

How Japan crisis is affecting U.S. business

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Posted: Wednesday, March 23, 2011 1:15 pm

Although the crisis in Japan is not expected to have a big impact on the world's economy, it could have a modest effect on some U.S. companies.

Investors haven't hesitated to dump stocks that could be hurt and scoop up those that could benefit. Whether those were wise moves or overreaction remains to be seen, but here are some U.S. stocks that had the biggest moves last week in response to the March 11 earthquake, tsunami and ensuing nuclear disaster. For comparison, the Standard & Poor's 500 index ended the week with a 1.9 percent loss.

-- Luxury goods: Japan is one of the world's top luxury goods markets, and fears of a slowdown hurt Coach (down 11.1 percent for the week) and Tiffany (minus 9.3 percent). Both companies get about 18 percent of revenues from Japan. Polo Ralph Lauren got only 9 percent of revenues from all over Asia last year, but its stock still took a 7.8 percent drubbing.

-- Software. Japan accounts for 7 to 8 percent of global software sales. Companies with bigger-than-average exposure took a beating, led by Adobe Systems, down 7.6 percent for the week. Japan is Adobe's second-largest market and generated 13 percent of revenues last year. Patrick Walravens, an analyst with JMP Securities, cut his 2011 earnings estimate from $2.29 to $2.23 to account for the potential impact.

-- Salesforce.com dropped 6.15 percent. Japan accounts for 8 to 9 percent of its revenue, and its "aggressive growth plans" for the country "may now be muted/delayed," FBR Capital Markets analyst David Hilal said in a note.

-- Life insurance. Some U.S. life insurance companies with exposure to Japan sold off on concerns about the disaster's effect on their claims costs, investments in Japanese stocks and bonds, and short-term sales prospects. But some bounced back after a Morgan Stanley report pointed out that disasters highlight the need for insurance. It noted that life insurance sales soared after the Sept. 11 attacks and Japan's Kobe earthquake in 1995.

Even so, Aflac ended the week with an 8.8 percent loss, not because it fired the voice of its duck for insensitive comments about the disaster but because 75 percent of its revenues and 86 percent of assets are attributable to Japan. The company sells health and life insurance in Japan, including cancer policies that pay a lump sum upon initial diagnosis plus ongoing benefits for hospitalization, outpatient and terminal care.

Credit Suisse analyst Thomas Gallagher does not think Aflac and other U.S. life insurers will face steep claims costs in Japan. "Since the area of Japan that was affected the most by the quake is a more rural region, we expect relatively small face values of policies, a relatively low insurance penetration rate and a likely lower share of foreign vs. domestic insurers will mitigate losses," he said in a note.

As for cancer claims, "While the power plant situation in Japan remains uncertain, we continue to believe that there is a low probability of a material increase in intermediate term radiation related cancer claims," he wrote.

-- Energy. The nuclear crisis has upended the energy universe. Many investors are assuming that some countries will come to rely less on nuclear power and more on coal, natural gas and alternative energies. Germany and China both announced major investigations or reconsiderations of their nuclear programs last week.

Shares in Peabody Energy and Consol Energy, export-oriented coal companies, were up 11.2 and 10.9 percent, respectively.

Coal companies also got a boost from a draft air pollution rule issued by the Environmental Protection Agency that was perceived as less negative than people were expecting, says Benjamin Salisbury, senior policy analyst with FBR Capital Markets.

Natural gas producers were also winners. Southwestern Energy gained 11.4 percent, and Range Resources jumped 7.9 percent.

On the alternative energy front, First Solar gained 7.1 percent.

President Obama reiterated his commitment to nuclear power last week, but ordered nuclear regulators to review U.S. safety technologies.

Nevertheless, shares in Exelon and Entergy, the nation's first and second-largest nuclear operators respectively, got hammered. Exelon dropped 7.2 percent, and Entergy -- which is facing some license renewal issues -- dropped 10.9 percent.

-- Supply chain. The real problem facing U.S. companies is not exports to Japan, but imports from there. A disruption in the supply of auto, electronic and other parts, materials and products from Japan could impact a wide range of manufacturers and retailers.

"It's a major potential problem," says Dale Ford, senior vice president with IHS iSupply. Japanese companies are key suppliers of semiconductor components, battery and display technologies and materials used in the manufacturing process.

Ford says most U.S. companies are still trying to determine whether their Japanese supplies will be affected and whether they can be sourced elsewhere.

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