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On the global recovery and what US companies’ 2Q20 results are telling us

06 August 2020

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by Peter Armitage, CEO

Last week was probably the busiest and most important week for global company results in many years and it gave us a real insight into what these companies are experiencing on the global stage. The results and investor takeaways are fascinating. Our analysts and fund managers have thrived in this environment and agility has been key. Below, we summarise the most important points from these recent results releases.

Investors heaved a collective sigh of relief in recent days as 2Q20 US company results were released. To date, c. 75% of US companies have reported their 2Q20 results and, while sales and earnings were, on average, down 12% YoY, this was still significantly ahead of expectations, with sales 4% ahead of consensus analyst expectations and earnings ahead by a massive 22%. So far, so good, but it is still early days.

Global company July turnovers are in many instances close to pre-COVID levels and certain e-commerce companies’ prospects have improved dramatically, accelerating growth by many years. However, in numerous instances quick recoveries are already priced into these shares and there is a risk of high market expectations not being met. From some companies there is also an emerging trend that June/July is recovering more slowly, and the V-shaped recovery thesis is being challenged. It will take another quarter to know for sure, but the market is currently giving the US economy the full benefit of the doubt.

The aforementioned is our conclusion after the recent slew of US company results. In the last few days, we obtained valuable insights into how global businesses are faring in the current environment, as c. 40% of US companies (most of them tech majors) announced their results.

Given the sharp recovery in US equity markets, we are cautious about potential returns for the next 12 months. Below the index level, however, company specific opportunities exist. These fall into two categories: 1) Companies that will recover strongly, but whose share prices do not reflect that; and 2) those companies whose prospects have improved dramatically, and the shares still offer above-average returns.

YTD in the US, tech and related sectors are up around 20%, while the consumer, cyclical and financial sectors are, on average, down around 10%-15%. The S&P 500 Index’s 4.2% gain in July was enough to push it marginally higher (+0.5%) YTD, while the MSCI World is still down in the high single-digits.

So, what have we learnt from the recent US company results? Below, we highlight our conclusions coming out of these results announcements.

  • Consumer transaction volumes have, in aggregate, almost fully recovered to pre-pandemic levels (although we note that this is not necessarily the case for values):
    • A large proportion of transactions were redirected to online purchases.
    • The US stimulus (paycheck protection program [PPP] and the US unemployment insurance boost) has been effective here.
  • eCommerce is booming (Shopify indicated in its results presentation that “2030 was brought forward to 2020”).
  • Online advertising revenue was under pressure from corporate cutbacks but is still better-than-expected.
  • Industrials and consumer-facing businesses are seeing continuous sequential improvement but are generally still c. 10%-15% down YoY in June, with some further improvements occurring in July.
  • Travel remains massively down but is recovering slowly.
  • Geographically speaking:
    • China has recovered remarkably quickly, and its economy is now growing – 2Q20 GDP growth was 3.2% YoY.
    • South America was hit the worst, with South Africa (SA) also not faring well.

Some examples of the various company experiences that inform our views above are as follows:

  • Visa’s 2Q20 transaction volumes are higher than pre-COVID levels, but total transaction values are down. Visa and Mastercard have been hard hit on travel-related and cross-border transactions, which are typically also higher margin.
  • PayPal has been a star performer and a beneficiary of the e-commerce boom. It was growing payment volumes at 19% YoY pre-COVID and this has accelerated to 30% YoY growth in 2Q20. We highlight that, although PayPal has less exposure to travel-related revenue than Visa and Mastercard, this increase includes absorbing a 60% YoY decline in travel-related revenue.
  • In the eCommerce space, Shopify’s 2Q20 revenue jumped 97% YoY, while L’Oréal indicated that its e-commerce segment had gained 10 years’ worth of growth in less than 10 weeks.
  • Amazon’s 2Q20 turnover rose a massive 40% YoY, which accelerated from a rate of 25% YoY for the last few quarters. Around 82% of US households now subscribe to Amazon Prime the company’s subscription programme that gives users access to additional services such as two-day delivery, streaming video etc. This is indeed an astounding figure.
  • For logistics and delivery business UPS, its business-to-consumer daily volume increased 65% YoY in 2Q20.
  • Alphabet’s (Google) revenue was flat in 2Q20, with online advertising and search down 9% QoQ which one would expect with corporate advertising spend coming under pressure. Importantly, we note that this is an indicator of corporate spend rather than a change in consumer behaviour.
  • Nearly all of McDonald’s restaurants around the world are now open for business and after the company’s sales were down 39% YoY in April, this improved to a 12% YoY decline in June.
  • O’Reilly Auto Parts (a spare motor parts bellwether) saw its 2Q20 revenue increase by an astounding 16% YoY. The company attributed this growth to US government stimulus and unemployment benefits – if you do not have a job you have more time to fix your car?
  • Apple saw its sales up a surprising 11% YoY, with growth in every region in which it operates and in every product category. Contrary to expectations, iPhone sales rose, but Apple’s highest growth rates were recorded in its iMac, iPad, and wearables categories.
  • General Motors saw its US sales more than halve in 2Q20, but sales in China recovered fully.
  • Harley Davidson’s worldwide retail sales were down 26% YoY in 2Q20, with sales in the US 27% lower YoY. Sales in Asia and Latin America declined by 10% and 51% YoY, respectively.
  • 3M, a well-diversified industrial player, indicated that its July global sales are up YoY.
  • As expected, travel has been a disaster and probably will be for some time to come. JetBlue, which carries more than 42mn customers p.a. in the US, saw its US capacity utilisation drop to 20% in 2Q20, with planned capacity utilisation of 55% for 3Q20.
  • Avis has reduced its global fleet size by 26%, with its 2Q20 revenue down a massive 67% YoY. While the situation is improving every month, it is still quite bad.

An aggregation of bottom-up stories helps us understand the bigger picture. Our “gut-feel” is that, for the average business YoY US sales will record a 5% YoY decline in the coming months, with a quick pullback in place and now the recovery, which could slow slightly. However, the key point that is apparent from the facts given above is that the “average” is misleading – every company, sector and geography is different. The UK market is still down 20% YTD. This is certainly no time for passive investment – one needs to be in the right market segments and geographies. With US share prices having rebounded and high expectations built in, the price of getting it wrong is high. We remain invested but we are also cautious and selective.

We conclude with a comment on the global economy from Blackstone (the biggest global private equity investor spanning many sectors) CEO Steve Schwarzman, from the company’s recent results presentation: “The global economy has started to reopen, but as we discussed previously, the road to recovery will be uneven with divergent trends across regions and sectors. Asia is clearly further along as is Europe, both of which were impacted by COVID-19 first. In the US, the economy was surprisingly strong in terms of employment gains in May and June with 7.5mn jobs added and a reduction in the unemployment rate from 14.7% to 11.1%. We have learned that people are anxious to re-establish their lives on a personal level and in terms of their work. However, with persistent or accelerating infection levels in many states, we are seeing some reversals of reopening plans, which will likely reduce the pace of future employment gains. While no one knows the exact course of the US economy, it is likely to be slower than anticipated over the next several months as a result. However, once infection levels subside, a stronger economic recovery should occur.”

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