Fool's Eye View

[ September 13, 2000 ]

It's the People's Petrol

By Rob Davies (TMFEssex)

Colchester, Essex -- The speed at which the "People's Petrol" crisis has developed has surprised everyone. It is still early days but, even if it is resolved rapidly, it will have significant repercussions for industry, business and the stock market.

As normal, the media focuses on the effect that this crisis has on schools and hospitals, but it will be the longer-lasting residual effects that we will be hearing about when companies report results for this period in six months' time. Remember three years ago many businesses blamed the "Princess Diana effect" for lower sales, and more recently we had brewers citing Euro 2000 as a reason for lower sales. In today's world of wafer-thin margins and ferocious competition, companies simply do not have the fat to cope with much in the way of a hiccup to their businesses.

Even such a well-managed business as Kingfisher (LSE: KGF) actually reported lower underlying earnings per share, 9.2p against 10.1p, today for the first half of the year. Although you had to dig around to find the correct figure, it insists on using the simple figures of 15.6p for the half year and comparing it to the 9.4p it made last year. But this year's number includes 8.8p of exceptional profits. Its operating profit margin slipped from 5.3% to 4.3%; this week's event's won't do it any favours at all. One of day of sales lost can never be recovered, but the fixed costs of debt and depreciation are still there.

Kingfisher is big enough to survive the odd week or so of poor trading that the people's petrol crisis has caused. But that won't be the case with many small businesses who already operate on tight margins and stretched banking facilities. Some of these will undoubtedly fail and the petrol crisis will be a convenient excuse. In itself that won't have a major effect on the economy or the market, but rising bad debts will hit others, and especially the banks. Just how much of a lending spree the banks have been on can be seen from these figures for net lending for this year from the Bank of England:

                £m
January      3,462
February     2,424
March        5,830
April        4,121
June         5,940
July         4,749

It is this growth in debt that has driven the economy and hiccups like the fuel crisis are the sort of thing that can stop it, or even reverse it. Were that to happen it might have a major impact on spending patterns.

Dramatic events like this also have unexpected knock-on effects. Last night and this morning it was the techMARK index that showed the biggest declines. Yet this sector is the one that is least affected by such old economy features as oil. But the fall reflects the reduction in confidence and it is always the most highly rated shares that suffer the most when that happens. So don't be surprised in six months' time when all sorts of companies blame the petrol crisis for poor results, and that might include some tech shares. Stand by for profit warnings.

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