by John Fox, CEO & Chief Investment Officer
What We are Learning
In almost every industry, in our opinion, business was very good in January and February. March started strongly as well; however, as events began to get canceled and stay-at-home orders were put in place due to COVID-19, there was a steep drop in sales.
Overall, management teams reacted very quickly to the sales decline by reducing costs and reevaluating plans for investment. Additionally, companies are focused on increasing their cash liquidity during the downturn by:
- Drawing on their bank credit lines
- Issuing debt
- Reducing capital spending
- Decreasing stock repurchases
- Suspending dividend payments (some corporations)
Outlook through Year-End
Last year, when we asked the CEO of one of our industrial holdings about their outlook, he said, “My crystal ball is a bowling ball!” This is especially true today.
Due to this unprecedented time, only a handful of the many companies whose reports we’ve analyzed gave an outlook for 2020 earnings. Of those, the projected decline in earnings is between -16% to -27%. This level of decline is similar to past recessions.
Here’s a summary of our analysis:
- Banks: Core earnings remain strong, but reported earnings were reduced as accounting requires banks to store some reserves to cover future credit losses. These reserves are an estimate based on an economic projection. We believe that banks should continue to earn profits before credit costs and that these credit reserves should continue to increase.
- Insurance: The industry is reporting very good first quarter earnings. But we expect their premium income to decline and insured losses to increase as they pay claims in areas like workers’ compensation, event cancellations, and more. As an offset, personal and commercial auto claims are down with the decline in miles driven.
- Industrial/Manufacturing: We identified a wide range of results depending on where plants are located and the customers they serve. For example, sales by manufacturers that create products used in the fabrication of automobiles or planes are down considerably. On the other hand, firms that sell to the pharmaceutical industry may be up. In places where plants are allowed to operate, corporations are deep cleaning facilities, staggering shifts, and using employee spacing to keep their operations running.
- Consumer Goods: This industry is doing quite well due largely to an increase in grocery and staples purchases. Businesses with a strong online presence are also seeing increased sales.
- Technology: Similar to manufacturing, there is a wide range of results. With many people working from home, there is increased demand for computer hardware, software, and wireless capabilities. Firms selling these products generally report an increase in sales, while those selling large equipment or other electronic components are seeing a sharp decrease.
- Travel: There has been a severe sales decline in airlines, hotels, cruise ships, and related industries. Travel companies are at the epicenter of the global pandemic and will take longer to return to business as usual. We anticipate sales dropping -75% to -90% for both airlines and hotels in the near term.
More Earnings Reports This Week
Nineteen more of our holdings are reporting their results this week. While Fenimore’s Research Team studies macroeconomic and geopolitical information, it is these company reports, as well as our year-round communications with our holdings and other enterprises of interest, that provide the best intelligence for our investment decisions.
It’s our experience that being invested in a handpicked number of quality businesses – that are financially durable, generate significant cash profits, and have accomplished, honest management teams – is the best way to protect and build wealth over the long term.
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 FactSet as of 4/24/2020