Companies Scramble to Respond to the Coronavirus
An article in the WSJ reports that "peak daily meeting participants have soared from 10 million at the end of December to more than 200 million as of March." The article mentions that much of this activity is confined to the free version, so it is difficult to determine how this will impact revenue, but the stock has been performing incredibly well: up 81% YTD.
Click on the link for a description of the challenges the company faces as it attempts to keep up with this fantastic growth.
Source: Dan Gallagher | “Zoom’s Runaway Success Carries a Heavy Burden” | The Wall Street Journal | 4/6/2020 | Visit
Supply-chain financing does not appear on a companies balance sheet except as trade debt or accounts payable, which can make it difficult to evaluate the degree to which a company is exposed.
An article in the WSJ detailed the threat this poses using the collapse of Carillion PLC as an example. The company reported ~$500 million to ~$600 million of supply-chain finance obligations as "other payables," which represented a far larger sum than the net debt balance of 219 pounds.
The lack of transparency makes exposure difficult to analyze, but as liquidity shrinks with declining revenues the growing concern is that lenders may not renew these offerings at a time when businesses need them most.
Source: Jean Eaglesham | “Supply-Chain Finance Is New Risk in Crisis” | The Wall Street Journal | 4/4/2020 | Visit
Per an article in Barron's, the coronavirus crisis is highlighting surging U.S. demand for cannabis. U.S. sales reached $13 billion across 33 states. The article did not provide prior year aggregate numbers but stated that Florida-based Trulieve Cannabis saw February's third week sales jump 50% over the corresponding week in January and another 50% in March.
Click on the link below for comments on valuation for specific stocks.
Source: Bill Alpert | “The Pandemic Highlights the Top U.S. Pot Producers” | Barron's | 4/3/2020 | Visit
An article in the Financial Times states that businesses in the adult novelty space are seeing revenues grow at unprecedented levels. The article did not provide statistics for the industry in aggregate, but anecdotal accounts suggest large revenue increases:
- Ritex, a manufacturer of condoms in Germany, reported that sales have doubled over the prior year.
- Eis.de, an online retailer in Germany, reported a "300% increase in sales aids for men and women in the southern state of Bavaria, and a 3,000% increase in demand for fantasy nurse costumes." Jumbo packs of condoms containing 100 units each jumped 500%.
Even with this incredible growth supply may not be matching demand. The article claims that retailers are struggling to maintain adequate inventory. Click on the link below for more examples.
Source: Guy Chazan | “Condoms and sex toys in demand from social isolators” | The Financial Times | 4/2/2020 | Visit
The WSJ published a letter written by the President of Holland America Line explaining the steps the company is taking to safeguard the passengers and employees stuck on their cruise ships.
"They are among the 9,000-plus passengers still remaining on about a dozen cruise ships world-wide."
Unfortunately as news of the virus spread local governments moved to expeditiously close ports around the world, creating what Mr. Ashford describes as a "not my problem" response. Sadly it sounds as if the situation is only growing more dire:
"Already four guests have died. The causes of death haven’t been confirmed, as we don’t do autopsies on our ships. But I fear other lives are at risk. ... There are also 1,167 healthy guests and 1,130 healthy crew across these two ships."
Click on the link below for the full letter.
Source: Orlando Ashford | “Lost at Sea in a Pandemic” | The Wall Street Journal | 3/31/2020 | Visit
Medical waste management firms in China saw volumes increase ~600% in Wuhan as infection spread. Per an article in the WSJ, Chinese officials stated that medical-waste facilities were at or near capacity in 29 cities.
Companies in the U.S. do not yet know how volumes will grow in the coming weeks. Offsetting the growth is the decline in waste generated by elective surgeries and procedures as well as the significant decline in dentist visits. The article also claims that this disease does not generate as much waste per patient compared against other prior crises such as Ebola.
Needless to say volumes are expected to increase. Whether or not demand was expected to overwhelm capacity in aggregate was not addressed.
Source: Saabira Chaudhuri | “Trash Industry Braces for Potential Deluge of Coronavirus Waste” | The Wall Street Journal | 3/30/2020 | Visit
The number of GoFundMe campaigns tied to small businesses provides another measure of just how much these companies are struggling during the coronavirus crisis. An article in the NYT states that coronavirus-related campaign growth grew 60% from 22,000 to 35,000 from March 20th to March 24th, and that as of the latter date 14,000 of these campaigns were tied to small businesses.
Crisis aside, campaigns average a 27% success rate (measured by goal achieved). Unfortunately the article concluded that surging demand and the fact that many potential donors were likely facing their own economic crisis would result in a lower success rate for these companies.
Source: Nathaniel Popper and Taylor Lorenz | “GoFundMe Confronts Coronavirus Demand” | The New York Times | 3/26/2020 | Visit
U.S. restaurant sales were forecast to hit $900 billion in 2020. With the impact of the Coronavirus coming into focus, the National Restaurant Association now expects industry losses in aggregate to total $225 billion. An article in the WSJ cites some of the steps restaurant owners are taking to avoid a permanent shutdown.
- Taking pay cuts and asking employees that remain to do the same.
- Substantially reducing employee count.
- Asking banks for relief. Per the article, banks can be understanding: "'We are taking steps proactively so that we don't allow a temporary problem for our clients to turn into a permanent one,' said Century Bank's Chief Executive Richard Drews."
- Asking landlords for relief.
- Cancelling all orders and contracts that are not essential. Examples included pausing contracts with vendors like OpenTable Inc. or cancelling orders on items like linens.
- Immediately looking to improve online presence and the ability to communicate with customers digitally. Using this strategy to increase pick-up orders and delivery.
- For those in dire situations, deciding how to prioritize payments due.
Source: Ruth Simon | “For Small Businesses, It’s a Virus Chain Reaction” | The Wall Street Journal | 3/21/2020 | Visit
An article in the FT reports that streaming giants Netflix and YouTube have reduced picture quality in response to the growing number of people that are working and learning from home. Per the article, reducing picture quality from high definition to standard definition has the potential to reduce the data required to watch the video by half.
“Netflix has decided to begin reducing bit rates across all our streams in Europe for 30 days,” the company said. “We estimate that this will reduce Netflix traffic on European networks by around 25 per cent while also ensuring a good quality service for our members.”
Source: Javier Espinoza, Nic Fildes, Hannah Murphy and Ti | “YouTube, Amazon and Netflix cut picture quality in Europe” | The Financial Times | 3/20/2020 | Visit
An article in the Financial Times reports that LVMH estimates it will deliver 12 tonnes of hand sanitizing gel to 39 hospitals in Paris. Most impressive is that the conglomerate organized this effort within 72 hours of the French government's request for help from the private sector. As for how LVMH managed to respond so quickly, the article elaborates:
- LVMH is family-owned with one primary decision maker, Bernard Arnault. Arnault is known for his decisiveness.
- Cosmetics manufacturing shares many similarities pharmaceuticals making it easier to repurpose equipment.
- "France turns out to be a pretty small place." The fact that the political and business elite cluster in the same places can be a benefit in times of crisis.
Click on the link below for an uplifting article.
Source: Leila Abboud | “Inside the factory: how LVMH met France’s call for hand sanitiser in 72 hours” | The Financial Times | 3/19/2020 | Visit
Precautionary measures taken to slow the spread of the Coronavirus are having a devastating impact on employees in hospitality, entertainment and leisure, among other industries. An article in the WSJ reports that the Union Hospitality Group recently eliminated 2,000 jobs, which equates to 80% of the workforce. The number is expected to get far worse. Per the article:
"Unite Here, a labor union that represents over 300,000 people working in hotels, gaming, food service, manufacturing, textiles, laundry, transportation and airports in the U.S. and Canada, said Wednesday it expects 80% to 90% of those workers to be laid off."
In response, unemployment claims are skyrocketing. Kentucky, which typically handles 2,000 cases per week, saw 9,000 just this past Tuesday (March 17, 2020). The article cites a handful of examples and comments on the Energy industry as well (click on the link below for more detail), but perhaps the most alarming statistic cited is that the Economic Policy Institute estimates that in total 3 million jobs will be lost by summer.
Source: Micah Maidenberg, Chip Cutter and Rachel Feintzeig | “Call It a Layoff, a Furlough or a Cut Shift: Americans are Losing Work” | The Wall Street Journal | 3/18/2020 | Visit
An article in the FT reports that private-equity backed packaging manufacturer Pacur recently executed a loan document with a novel concept: the "corona clause." This term would allow the company to add back estimates of revenue that would have been realized in the absence of the virus.
Previously loan documents included language allowing them to add back profits lost to “extraordinary, unusual, infrequently occurring or nonrecurring loss, charge or expense,” but this takes it much further. The ability to add back estimates of revenue that would have otherwise been recognized provides far greater flexibility, and makes it far more difficult for the company to default. Ultimately this would make recovery a greater challenge for debt investors.
(Note: The documents do not reference the virus itself, but the author believes that the virus-related crisis is why the language was drafted.)
Click on the link below for an interesting read.
Source: Joe Rennison | “‘Corona clause’ creeps into businesses’ loan documents” | The Financial Times | 3/17/2020 | Visit
The WSJ reports that both healthy and unhealthy companies are drawing down their credit lines in an effort to bolster balance sheets in response to looming uncertainty and declining revenues. The article cites several examples including that Micron Technology Inc. announced it would draw the full $2.5 billion from its credit facility, and that Aercap Holdings similarly stated it too would fully draw down a $4 billion credit facility.
In the wake of the crisis companies do not seem to care that this would normally be a red flag for investors. The article quotes a former debt capital markets banker: "Having the credit lines in place is not the same as having the cash on their books. Companies are doing what they can to ensure they have liquidity."
Source: Serena Ng | “Another Problem for the Fed: Banks Pressured as Clients Scramble for Cash” | The Wall Street Journal | 3/16/2020 | Visit