By Mike Houston and Jeff Tryka, CFA

Over the past few weeks, the Lambert team has been in touch with a broad range of contacts from the buy side and sell side and have found some common perspectives surrounding the current earnings cycle as well as longer-term perspectives for the remainder of 2020. We also recorded a webinar addressing these topics, available below.

Considering the rapidly evolving situation surrounding the pandemic, for the current earnings cycle, investors have been consistent in their areas for concern surrounding four broad areas: cash and liquidity, operations, supply chain and people.

  • Cash and Liquidity – investors are acutely focused on the level of cash liquidity (not just available credit lines, as many companies have drawn down lines to increase cash balances) and what actions companies are taking to conserve available cash. In addition, investors have begun looking at debt maturities scheduled over the next 2-3 years to assess whether they believe companies will be able to meet those maturities or refinance on favorable terms.
  • Operations – with many companies announcing reduction in operating hours or outright temporary plant closures, investors are very interested in how the closures and a subsequent reopening will impact operations, revenues, margins and bottom-line results. Investors have been asking about the speed of these actions (how quickly can you ramp down or ramp back up?), the timing (when did you decide to close and what mileposts should we look for to determine when you will reopen?) and the financial impact of these decisions (what are the discrete one-time costs, and what are the ongoing potential impacts for margins?).
  • Supply Chain – investors have zeroed in on the health of the global supply chain, with considerable focus on suppliers based in China. They have been asking about supplier inventory levels, and even second derivative supply questions (if you purchase components from a supplier, what is the status of that supplier’s supply chain, or more recently, is your supply adequate if one of your major suppliers shifts production to areas with more acute needs, such as ventilators or PPE?). They will also look downstream at the health of your customers, their inventory levels and specific geographic (state or local) restrictions on their operations.
  • People – investors have been very interested in what companies are doing to protect their people (safety procedures, cleaning, remote work, social distancing) and provide for them in the event of temporary shutdowns (are you offering any continued salary or benefits? Any other programs to help your workers?). Many investors are also very interested in the concept of shared sacrifice and may ask whether senior management has forgone salary, bonuses or other compensation. This has been a big concern among a subset of activist investors.

For the remainder of 2020, a number of common themes have emerged regarding how investors expect the year to unfold:

  • For the second quarter, most investors are expecting significantly negative results as companies deal with the full impact of the pandemic on their markets and operations. With low expectations for core business performance, most investors view the second quarter as an opportune time to evaluate any potential write downs or impairments to essentially “clear the decks” and allow companies to move on from the pandemic with clean balance sheets.
  • For the third quarter, investors are expecting a transition quarter, as companies restart operations more fully and their end markets begin the recovery process. As a result, performance expectations for the third quarter remain subdued.
  • The fourth quarter currently includes expectations of more normalized business results, barring any emergence of broad new COVID-19 cases with the normal flu season. Despite an expectation of a return to normalcy by the end of the year, most investors are viewing the full year as a washout year given the unusual circumstances and poor economic performance. As a result, most will begin viewing 2021 results in comparison to 2019, to assess overall growth and performance, so adjusting reporting to provide 3-year comparisons is advised.

For more, watch the full webinar:

We continue to see these concerns evolve with each news cycle, and we would be happy to schedule a call to see how we might help your team prepare for what is likely to be a stressful earnings season.

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