May 15, 2020
In the US, over 90% of companies have now reported their quarterly results. Earnings are down -7.2% for first quarter of 2020 compared to the same quarter a year ago, on the back of anemic revenue growth of 0.9%. In this article, we aim to summarize our key takeaways.
G U I D A N C E | The blind leading the blind
During this earnings season which collided with the coronavirus crisis, CEOs and CFOs have proven to be just as much in the dark as anyone, with the majority of companies withdrawing forward guidance. No one knows when the rate of new infections will peak or how long the development and deployment of a vaccination will take. Until the epidemiological factors are known, it is fruitless trying to make accurate economic projections.
This means investors are left facing a whole host of unanswered questions.
Moreover, without anything to grab hold of, analysts have been dialing down their expectations for 2020 earnings growth drastically: The Q2 bottom-up EPS estimate declined by a record 28.4% in April. By travelling in the opposite direction to equity prices, from a valuation perspective, these revisions have made equities increasingly expensive: As FactSet’s John Butters points out, the S&P 500 has now recorded a forward 12-month P/E ratio above 20 for the first time since April 2002.
L E A D E R S H I P | Heavyweights show resilience
There is one dimension where Covid -19 has not led to major changes: stock leadership. In fact, the crisis seems to be emphasizing the gap between the winners and losers. The fact that top performers capture a large market share, making it difficult for rivals to compete remains relevant. The feedback loop in which a company’s success is driven by cheap capital and it’s access to cheap capital is a result of its success, is here to stay. More than ever, digital consumption, privacy, security and big data are the battlefields of competitive advantage.
Those dominating at the moment are the US TMT (technology, media and telecom) behemoths, such as Amazon, Facebook, Netflix and Microsoft – the latter said that Covid-19 had a “minimal net impact” on its overall revenue. These types of firms as well as growth stocks should continue to lead.
Other winners of tomorrow could easily be pharmaceutical, biotech and live-science companies with massive flows of capital directed towards virus related research.
N U M B E R C R U N C H I N G | Fortune favours the financed
With the aftermath of the pandemic and any collateral damage still unknown, a clear understanding of liquidity and solvency parameters is pertinent. Investors should be more concerned with balance sheets than income statements at this time in order to avoid investment traps and plays on firms that make (permanent) losses from activities. An ability to assess balance sheet strength on axes such as liquidity, cash burn and maturity schedules will be more rewarding than simply buying a “quality label”. Well-capitalised businesses will have an increased advantage for the next few years.
S T A T E I N T E R V E N T I O N | Watch this space
The support of governments and major central banks to contain the economic damaged has bordered on the brink of unconditional. Their “everything and the kitchen sink” style stimulus packages have prevented capital market Armageddon and a credit crunch. However, it is becoming clearer that their actions were not a “one off” and we can expect them to have a bigger presence in the private sector moving forward. Take for example, Lufthansa, the German airline giant. According to the CEO Carsten Spohr, the company is currently losing a million euros per hour and state aid will be needed if it is to survive. Already, in the US, airlines have been granted a $25 billion bailout, with the condition that they offer stock warrants – giving the government the right to buy shares in the companies – on a portion of those funds.
So, while the earnings season didn’t offer so much in the way of guidance, reading between the lines, we can still draw some conclusions about what to expect moving forward. The “whatever it takes” mode which policymakers have entered into, has helped avoid short-term turmoil, but a host of firms will likely need more assistance. Consequently, we could see central banks metamorphose from their role as the lender of last resort, to become buyers of last resort. Similarly, governments could evolve into moratorium courts, insurers and bailout organisations, ultimately having a greater presence in the private sector.
The earnings season further supports our preference for being sector neutral, given the abyss between winners and losers within sectors. Instead, we have cherry-picked select names across the spectrum of sectors, which look best poised to weather the storm (accounting for the fact that the companies that are making a killing today due to the lockdowns might not do so well once the crisis blows over). Nonetheless, digital consumption, privacy, security and big data should maintain their relevance when it comes to gaining a competitive advantage, but with that said, the benefits hailing from a strong, well-capitalised balance sheet, should not be underestimated in the next months.
 An aggregation of the median EPS estimates for all the companies in the index
Author: Group Investment Office