Coronavirus – the industry winners & losers continued (Part 2)

Back for Part 2 of this article. I (and many of you reading this) will now be over a month into the Coronavirus/Covid-19 lockdown. A time of writing, total known cases globally stand at 2.4 million and there have been 165,000 deaths. The human tragedy and cost is staggering. The vaccine needs to arrive quickly and forcefully.

So what of the economic cost? Since mid-March, governments across the globe have announced record-breaking stimulus packages, wages & salary backstops for staff and businesses, central bank interest rate drops to record lows, tax reliefs and more. There will no doubt be winners and losers. Stock markets have seen a small rally since the lows of mid-March, but most stocks are off at least 20% from their recent highs at the start of the year. As results season gets into full swing, that is when we’ll be getting a much clearer picture of the effect on businesses.

In Part 1 of this article I analysed a number of industries and categorised them as probable winners, losers or ‘jury’s still out’. A few weeks on, in this second part I provide my thoughts on a number of other industries and what their prospects look like.

As always, I look forward to your thoughts.

The Losers….

Oil & Gas

A cyclical industry at the best of times, the Oil & Gas industry is infamous for its classic peak & toughs, feast & famine characteristics. The coronavirus has caused a catastrophic fall off in demand as people stay at home in lockdown, and no longer drive their vehicles as much. With most airlines grounding their fleets, airline fuel demands have fallen also.

This fall in demand and its impact on prices (demand falls will cause price falls according to classic economic theory) were exacerbated by a price war between Saudi Arabia and Russia. The kingdom continued to flood the markets with oil supply and slash prices further to stimulate buying, after Russia declined to continue a 3-year old production restraint designed to shore prices. The standoff ended about a week ago, helping prices recover slightly but Brent Crude (global benchmark for oil prices) sat below $30 per barrel. Most Oil & Gas players require prices to be above $50 per barrel to make projects economically viable. The resultant effect has been job losses and curbs on large scale capital expenditure to conserve cash.

Professional Services

Professional accountancy and law firms have never before faced such an acute situation. Revenues from advisory work in tax, mergers & acquisitions and public listings have all but dried up as their clients put off new share sales and acquisitions to preserve capital. Staff have either been asked to take pay cuts, voluntary redundancy or placed on furlough schemes and partners (those owning a piece of the partnership structure) have deferred/delayed profit distributions to conserve cash. Professional services firms tend to have thinly-capitalised balance sheets (as most profits are drawn out by distributions with a proportion retained to support ongoing growth).

Some players have tried to be more creative and re-deploy staff with the necessary skills to areas where demand is strongest e.g. audit work (for accountancy players) and restructuring and bankruptcy advice.

The largest professional services firms are structured so that they have in place divisions that act counter to the economic conditions prevailing and will survive beyond the current crisis, but smaller firms with greater specialisms to areas that do well in a market upturn will struggle.

Luxury Goods

A global pandemic such as the current one has decimated demand for luxury products and services as the enforced lockdowns continue. As businesses and individuals look to conserve cash, all discretionary spending tends to zero.

Luxury good players such as those in high-end fashion will be materially feeling the pandemics’ effects. Beautifully-kitted out, expensive, experiential stores attracting affluent customers are closed and real estate costs continue to drag down financial performance. Revenues have fallen dramatically and staff furloughed (where the employer might then top up salaries) will hammer results until the end of the year at a minimum.

The larger, more famous brands will likely have enough cash on their balance sheets to see out the crisis, but it will be painful. However, it’s good to see luxury players like Louis Vuitton Moet Hennessy (LVMH) retool factories away from luxury handbags to instead make hand sanitisers to help combat the crisis.

Advertising

After staff costs one of the most common areas on the profit & loss statement to be scrutinised for cutting in a downturn are advertising costs. Those reliant on advertising income (e.g. TV and radio broadcasters) will have seen falls in revenue as advertisers look to cut spending by either pulling advertising completely in some areas or look to renegotiate rates during this current time.

The large tech companies (e.g. Google, Facebook etc) that draw a large proportion of their income from advertising will be weathering the current crisis. As more people stay at home during the lockdown and use the internet and social media to interact & work, so the number of eyeballs increases strengthening their case for a greater share of advertising spend during this pandemic.

The Winners

Logistics (incl. Online Food Delivery)

Despite the crisis, those of using working from home or out on the frontline still need to eat, get goods for the home etc. Getting goods delivered to our front doors relies on supply chains and logistics working optimally. There’s no doubt the current situation has stressed supply chains, identifying where the weakest links have been and what requires fortifying. Logistics industry job roles have been the biggest advertised here in the UK alongside supermarkets and IT roles since the start of the pandemic.

Interestingly, online food delivery apps like Deliveroo and Uber Eats would be obvious winners from a lockdown, however large scale closures of restaurants that they rely on has not helped, even if partially offset by these apps partnering with smaller local outfits still open but doing delivery-only orders.

I’m expecting the coronavirus pandemic to drive a great digitisation and consolidation within the massive but highly fragmented logistics industry. Amazon last week had a $575m investment in Deliveroo hurriedly cleared by the UK’s Competition & Markets Authority to help Deliveroo avoid collapse as it sees a fall in revenue. Don’t expect this to be the last such deal to be done in this space.

Technology & IT

Zoom (despite its privacy issues) has seen a surge in activity during the lockdown period. Other tech platforms which make remote working easier and possible e.g. Slack, are also seeing incredible growth. People are realising that working remotely, whilst not perfect (and can’t possibly replace face-to-face interactions despite what people might say) can at least ensure that business can continue along a ‘normal’ route during the lockdown.

There have been a number of predictions that employers will now be questioning how and where their employees work post-pandemic. Commercial real estate is under the spotlight and investors in this space should be worried. If I’m a large Fortune 500 company and I can still keep operations going whilst 99% of my staff are working remotely, then I’m going to be seriously questioning my real estate cost base (WeWork is another that could be very worried). This is going to cause a huge shift in the way people work going forward. Technology companies that enable this are going to emerge as the big winners.

Views on some businesses analysed in Part 1

Back in Part 1, I talked through a number of industries that I thought would be winners and losers during this crisis.

Airlines are still grounded, with a number resorting to cash-raising measures such as discounted share/stock sales, debt-raisings and sale & leaseback of grounded planes to shore up balance sheets. Will air travel ever be the same again?

Grocery retailers continue to go from strength to strength. They are now proving their amazing resiliency whatever market conditions (when things are good, people have more disposable income and will spend on more luxury/high-margin foods. When things are bad, people still need to eat). Those with strong online offerings (like Ocado in the UK) have seen valuations surge and sales increase faster than ever before. With no need to discount food or offer promotions, the margin mix is optimised for maximum profitability.

A number of the large Wall Street banks have put large provisions for bad debts they are expecting to arrive as affected individuals and businesses default on loans. Profits will be down significantly this year, but on the plus side the banks are much stronger and better capitalised due to regulatory pressure to raise capital following the 2008-9 financial crisis.

So there you have it. There are upsides to every downside, winners and losers have emerged. Every crisis in history has been the catalyst for enormous change. The world is going to change, and in a big way.

Disclaimer: The views presented above are my own, and do not reflect the views of any of my associates, colleagues or employer.