Just as governments switch to damage-control mode,so too should industrial investors
The question is no longer which industrial companies will suffer from the coronavirus fallout; they all will.
The markets whipsawed this week as the pandemic continued to spread, forcing governments around the Western world to transition from containment efforts to draconian attempts at mitigating the worst possible public health impact. The result was a US travel ban on foreign nationals from 26 European countries; a moratorium on college and professional sporting events; closed schools and museums around Europe; a ban on bars and restaurants in Italy; and a ban on large gatherings in New York and Los Angeles, among many other things. The worst day for the stock market since Black Monday 1987 finally pushed governments into action, with Germany pledging to spend whatever is needed to help its affected workers and companies weather a sustained economic standstill and the European Commission vowing to relax fiscal and state-aid rules to give countries leeway for stimulus measures. In the U.S., the Trump administration and Congress were still haggling over a package to respond to this crisis as of midday Friday, but did appear to be working toward a deal. Separately, the administration is working on financial assistance for airlines.
Even with the wheelbarrows of money now on offer, a V-shaped recovery looks unlikely. While there are encouraging signs of a return to life in China, many factories are still operating at reduced capacity, according to the New York Times. Nearly 75% of US companies have experienced supply-chain disruptions because of virus-related shutdowns, according to an Institute for Supply Managment survey. It's unclear if a massive wave of financial stimulus will convince virus-stricken consumers and businesses to spend again, particularly amid elevated levels of household and corporate debt. It's telling that even with the stimulus measures providing a modicum of light at the end of the tunnel, literally the only stock still in the green on the S&P 500 Industrials Index this year is bed-bug and cockroach-killer Rollins Inc. People are still going to want their homes and restaurants to be bug-free, but how long until they're willing to take a flight across the ocean again? Or maybe a better question is, how long will it be before governments will let them? Other questions that come to mind: When do companies feel comfortable buying factory-automation equipment again? Or mammography machines for that matter, with most health-care dollars likely to go toward treatments for the coronavirus for the foreseeable future?
Hiding out with the cockroaches
There were few places to hide in the virus-fueled selloff among S&P 500 industrial stocks.
No one knows the answers, but it seems likely that things will continue to get worse before they get better. Assuming that's the case, it feels prudent to focus on those companies in the manufacturing world that will have the hardest time in the difficult period to come. The key characteristic is going to be debt, whether accumulated through ill-advised share repurchases or acquisitions. A few companies come to mind.
It makes sense to start this conversation with Boeing Co, a company for whom all of its speculative decisions are coming home to roost. Air Canada is cutting 18% of its order for Boeing's 737 Max and more cancellations will likely follow as the global grounding of the jet reaches a year. That leaves Boeing perilously dependent on cash flow from wide-body models that are bound to fall further out of favor with the reduction in overseas travel demand. The company spooked investors by shifting into cash-preservation mode this week. It's limiting discretionary spending and overtime pay and freezing hiring, with Reuters reporting that layoffs or furloughs are also a possibility; at the same time, Boeing plans to fully draw down a $13.8 billion loan as a precaution amid the coronavirus turmoil. JPMorgan Chase & Co. analyst Seth Seifman said a dividend cut is possible, noting that bringing the annual payout to less than $5 a share would free up $2 billion in cash. The cost to insure the company's debt against default for five years widened to as much as 400 basis points this week, the highest ever, according to ICE Data Services.