Edward M. Kerschner: Paine Webber's Chief Investment Strategist
New York Times
September 27, 1998
By DANA CANEDY
Edward M. Kerschner has seven television sets in his Long Island,
N.Y., home. His refrigerator is stocked with Snapple, Coca-Cola
and Hellmann's mayonnaise. And he brushes his teeth with Crest.
That may be more than you wanted to know about Kerschner, Paine
Webber's chief investment strategist, but his buying habits reflect the
trends that are influencing his stock picks.
As he and other baby boomers age, says Kerschner, 45, the attitudes of
the largest, fastest-growing, wealthiest segment of the population have
changed -- and those changes are affecting what boomers spend on
everything from soft drinks to vacations.
He says the trends, outlined in a recent Paine Webber report titled "The
New Millennium American," provide tremendous opportunities for certain
business segments and companies that satisfy the new demands.
Kerschner's thinking goes like this: With most of their material needs now
satisfied, boomers today place more value on experiences than on
tangibles. That represents a vast change in consumer behavior.
He also says that peeking into the refrigerators, closets and minds of
boomers, to discover what they are buying and how they spend their
time, offers insights into the long-term trends that drive product and
service choices; in turn, that allows for superior stock-picking by helping
to identify the companies that best serve boomers.
These consumers -- now settling into middle age and beginning to think
ahead to old age -- are the ones who will drive corporate prosperity for
years to come.
"If you're right about the trends, the stock-picking is easy," Kerschner
said of this thematic investing approach. "I mean, they become obvious."
What are the trends that can make companies, and their investors,
wealthy? Based on a study Paine Webber commissioned from Gallup and
polls of consumer behavior conducted by Yankelovich Partners, the
brokerage firm identified five trends and some of the businesses that
should benefit by catering to boomers.
Kerschner calls the first trend "cradle-to-grave entrepreneurialism." As
Kerschner describes it in his report, it's a hodgepodge of trendlets: people
taking over responsibility for their retirement through 401(k)s, more
people working for smaller companies, people changing jobs more often
and taking it upon themselves to get business training. And more people
want to keep working after retirement age.
The trend of lifelong entrepreneurial workers, Kerschner maintains, will
benefit businesses whose products either are suited for the home office or
aid the entrepreneurial life by helping people do their own taxes, investing
and the like.
Staples, the office supply company that keeps small companies and home
offices running, is a prime example. Kerschner forecasts that its earnings
per share will grow about 30 percent annually in the next five years.
The next trend, "the time drought," is centered on his observation that
people's to-do lists are growing at breakneck speed -- so much so that
even "spare time" becomes stressful.
Today, for example, it is common for people to simultaneously drive a
car, listen to the radio, conduct a phone meeting and receive a fax.
Kerschner thinks this sort of time management overload is a huge plus for
companies like Gap, Procter & Gamble and Tiffany & Co. Why? Their
trusted brand names save time by making shopping easier.
Kerschner estimates that Gap's earnings per share will grow 18 percent
annually in the next five years and that those of Procter & Gamble and
Tiffany will grow 13 percent and 17 percent, respectively.
Another trend is something Kerschner calls "the no-service/full-service"
economy. Middle-market companies, like retailers, are finding it
impossible to provide much service to the masses at a reasonable price
because of a tight labor market.
And most people are learning to do without service, either by shopping
the Internet or by frequenting retailers that offer efficiency and good value.
That should be a plus for companies like Wal-Mart and Bed, Bath and
Beyond. Paine Webber estimates that earnings per share at Bed, Bath
and Beyond will grow 28 percent annually and those of Wal-Mart about
14 percent annually in the next five years.
The big Internet beneficiary, he says, is America Online, where
consumers can buy everything from jeans to Jeeps. He projects 50
percent annual growth in its earnings per share over five years.
But a bifurcated economy is developing, as the carriage trade -- including
many of the stressed-out, time-starved consumers that Kerschner
identifies in "the time drought -- is demanding more service. This will
benefit retailers known for their service, including Nordstrom, whose
earnings per share Kerschner sees growing at 15 percent a year over the
next five years.
He likes the retailer for its willingness to raise customers' hemlines on
demand or ship a product across the globe in the name of superior
service.
Kerschner also believes in what the report describes as "the new drug
culture" -- boomers' penchant for using drugs to "fix things." Think Pfizer's
Viagra. The study concludes that because of this trend, boomers are
attracted to "better-for-you" consumer products, too. That explains the
rise in demand for herbal supplements, hair growth medication and
prescription diet pills.
In general, drug giants like Schering-Plough, with a projected earnings
growth rate of 14 percent a year for the next five years, should benefit by
being in a market that serves an increasingly aging population.
The strategist also sees growing demand for what he calls "stressless
leisure." Boomers, Kerschner says, want more fun with less effort as they
age. By this way of thinking, donkey rides down the Grand Canyon are
out and cruises are in. More than 90 percent want "relaxing" vacations,
the survey says.
Companies that could capitalize on this trend include Delta Air Lines,
whose earnings per share Kerschner expects to grow 12 percent a year
in the next five years, and the Carnival Corp., which he sees growing at a
17 percent pace.
Kerschner also likes Four Seasons Hotels, where overworked,
stressed-out boomers can turn for rejuvenation. He expects its earnings
per share to grow at a 20 percent rate.
Some of these trends, of course, represent rather touchy-feely thoughts
by Wall Street standards, and are certainly debatable. Even so,
Kerschner, a mathematician by training, is paid to be right. And he is
convinced that studying what he calls "shared life experiences" of certain
groups instead of traditional business cycles is a sure way to pick a stock
winner.
That is not to say he doesn't look at price-to-earnings and
debt-to-capitalization ratios. He simply prefers to factor in emerging
trends than to reflect on past patterns and behavior.
"The street typically analyzes historical patterns and says, 'Oh, it's
happening again,"' Kerschner said. "Historically, analysts look at the past
to predict the future, but in this case, the past is not going to predict
behavior because of shared life experiences" that change from generation
to generation.
"I remember gas lines; my parents remember bread lines," he said, adding
that those benchmarks, in part, set the tone for each groups' political and
marketplace priorities.
Not everyone agrees with all of Paine Webber's conclusions. One
marketing expert said she agreed with the drug-culture concept and had
no problem with the work-beyond-retirement claim, but she questioned
the assumption that boomers wanted stressless leisure.
"We are seeing much more exotic vacations," said Cynthia R. Cohen
president of Strategic Mindshare, a marketing and management consulting
firm in Miami. "Do you know how many people are going on safaris?"
Boomers, she said, are more concerned than ever with their golf scores
and "upset that they can't shoot hoops the way they used to."
nytimes.com
The following Bloomberg article has Pfizer as one of top picks:
Staples, Gap Among Picks of Paine Webber's Kerschner, NYT Says
quote.bloomberg.com |
