Tech's Torpor Fattening Kraft's Coffers
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Say this for
Kraft
(KFT)
: Its timing could hardly be better.
Tuesday has been another lousy day for technology stocks, casting more doubt on the hoped-for
second-half recovery.
Nokia
(NOK) - Get Report
warned that slower growth will cut into second-quarter results and that it is "revisiting" its second-half outlook. Rick Sherlund, the closely followed
Goldman Sachs
software analyst,
said he would be "relieved" if the companies he followed met estimates, and that his earnings forecasts for the year appear to be at risk. Tech stocks
have taken a dive: At midafternoon, the
Nasdaq Composite
was off 46, or 2.1%, to 2124.
With the future looking more treacherous by the day for tech companies that once saw nothing but blue sky ahead, investors are naturally trying to reduce their risk. That's where tomorrow's initial public offering of Kraft, the big U.S. food company and unit of
Philip Morris
(MO) - Get Report
, comes in.
Demand for shares of Kraft is strong: The IPO is said to be 7 to 8 times oversubscribed -- that is, there are seven or eight buy orders for every share to be sold -- suggesting that the stock will almost certainly rise well above its offering price when it begins trading tomorrow. The offering is scheduled to be priced after the market closes Tuesday evening.
One trader says the recent weakness in the stock market probably has contributed to the strong demand for Kraft, which this morning raised its expected offering price to $30-$31 from $27-$30. An offering at the higher price would raise $8.7 billion for Philip Morris, which will use the money to pay down debt.
"Usually, whenever you're pricing a deal you want to do it into a rising tape," a trader says. "But there are only two little pockets on my screen that are showing any green today, and one of them's consumer staples."
When doubts about the nation's business outlook come to the fore, investors' appetite for stocks like Kraft rises. That's because the zigs and zags of the economy have only a muted effect on consumer staples companies' sales. Although consumers may reach for lower-cost items in the grocery store aisle, even in the worst of times we've all got to eat. And because food sales continue to grow even as other areas of the economy flounder, says
Merrill Lynch
chief quantitative strategist Rich Bernstein, "consumer staples tend to do very well."
Kraft is benefiting from the change in the market since the Nasdaq peaked in the spring of 2000. Then, investors scrambled to get into the latest Internet IPO, lured by visions of a gold-paved future. Now, people are clamoring to get into a company that gives them constant earnings, dividends and a
chance to sleep at night. It's a less exciting investment, but also probably a more lucrative one.