Saturday, September 6, 2008

Recession Beneficiaries

When incomes fall, certain industries and products suffer disproportionately. For example, we saw here that for every 1% drop in US incomes, airlines lose about 6% in revenue!

Interestingly enough, there are actually products for which demand increases as incomes drop! These are referred to as inferior goods, since people buy these instead of buying a product they actually want but can't afford! Tutor2u classifies frozen vegetables, processed cheese and tinned meat among this group of inferiors.

With US job losses mounting and its unemployment rate rising, companies that provide such products may actually find themselves in boom times! Consider Kraft (NYSE: KFT). Although Kraft provides a wide variety of products, one could argue that many of their processed and packaged foods are precisely the inferior goods which see demand increases when incomes drop.

Indeed, Kraft's stock rose almost 10% in late July after beating earnings estimates for the quarter on higher revenue. Considering the types of products Kraft this really a surprise? What other companies appear poised to increase earnings in these rough times thanks to the types of products they sell?

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