Third-quarter earnings were great — until you look underwater

In the currently ending third-quarter earnings season, S & P 500 companies generated over 27% overall earnings per share growth and over 15% revenue growth. This suggests a strong recovery from the 2020 pandemic lows.

But high growth, off the very low ground for many companies, masks fundamental problems that do not herald the future. An analysis of the underlying strengths of one economically sensitive sector, a travel and leisure company, highlights this trend.

The sector, which borrowed heavily to survive the worst of the pandemic, was expected to see a surge in flight and hotel room demand in the summer as the vaccine program began in the spring.But the expectation is Highly contagious delta variant Of the coronavirus that brought cases, hospitalizations and deaths back to the levels seen in winter and discouraged people from leaving home.

“The largest travel and leisure listed companies are still at stake,” said James Gelert, CEO of Rapid Ratings, a company that evaluates the finances of private and public companies.

“For these companies, much of the pain has been going on for over a year, mainly due to empty properties, unsold tickets, continued confusion over blockade and quarantine policies, and optimism that hasn’t been fully realized yet. It is due to. ”

The travel sector is not the only one in pain. Many industries are suffering from inflationary pressures, supply chain hassles, border closures, and quarantine measures such as automobiles and retail. Both saw significant changes in cash to current liabilities from 2019 to the end of 2020.

“People look at all industries and the companies within them to carefully observe whether the” new “liquidity gained in the last four to five quarters can sustain or support them for some time. We need to monitor it, “Gellert said.

Watch now: Expectations for more business trips are diminishing for US airlines as the September bump does not materialize.

Deep dive

RapidRatings analyzes a company’s finances and assigns a financial health assessment (FHR) and a core health score (CHS). The former is a measure of short-term bankruptcy probability, and the latter evaluates business efficiency from a two- to three-year perspective.

“”“The largest travel and leisure public companies are still at stake. For these companies, much of the pain is largely due to empty properties, unsold tickets, ongoing confusion over blockade and quarantine policies, and It has been around for over a year, caused by optimism that has yet to reach full reality.

— RapidRatings, CEO, James Gellert

Both generate numbers on a scale of 1 to 100, grouped into categories based on risk, as a way for potential business partners, vendors, or counterparties to determine a company’s long-term performance. increase. Only financial data is analyzed, not other market data, including stock prices and investor sentiment.

As the graph below shows, a sample of companies in the travel and leisure sector had almost strong FHR at the end of 2019, before the outbreak began. Southwest Airlines Co., Ltd.
FHR led the pack at 91, but plummeted to 48 at the end of the second quarter and was placed in the Rapid Ratings “Medium Risk” category.

Similarly, Delta Air Lines Inc.of

FHR fell from 87 at the end of 2019 to 25 at the end of the second quarter and was well-classified in the “high risk” category. Online Travel Site Booking Holdings Inc.

FHR dropped from 86 to 53. LasVegasSandsCorp.
+ 0.18%

It fell from 86 at the end of 2019 to 24 at the end of the second quarter.

Source: Rapid Ratings

The core health score has not improved any further. Southwest Airlines went down from 84 to 18, Delta Air Lines went from 86 to 23, Delta Air Lines went from 86 to 23, bookings went from 81 to 31, and Las Vegas Sands went from 83 to 20. All of these are low scores, which means high risk. In the medium to long term. Marriott International Inc. only.

To stay in the “medium” category of Radpi Ratings, it escaped the low core health score, which dropped from 78 to 53 at the end of 2019.

Source: Rapid Ratings

“The holiday season could boost revenue for many of these companies, but if raw fundamentals don’t show signs of improvement after the next quarter, hangovers will be even more unpleasant next year,” Gerato said. Stated.

Cash is the king

In the midst of the 2020 blockade and movement restrictions, public and private sector companies will be forced to do whatever it takes to gain more borrowing, longer maturities, and short-term liquidity. After that, the numbers are getting worse.

The aviation sector, which was hit when the destination stopped last spring, begged for government bailouts to increase liquidity, but with some complications. Some airlines have run out of cash due to ground flights and have issued bonds backed by their own loyalty programs.

The cruise department was further hampered when the center or the Centers for Disease Control and Prevention mandated closure for more than a year. The company fought Florida About their policy of requiring their crew and passengers to be vaccinated with COVID-19.

Carnival Corporation.
By the end of 2021, which had the lowest FHR score of any sample company, almost 22 months after the COVID-19 breakout was declared pandemic, its goal was 65% of the world’s cruise capacity operates..

Source: Rapid Ratings

Survival on means raising $ 4.1 billion in new debt, negotiating revolving credit facility revisions, restructuring, participating in government aid programs such as wage assistance programs, repurchasing shares and suspending unnecessary travel. , Meaning various actions such as reduction. Marketing spending and investment sales, According to the 2020 annual report It was released in February.

“Cheap and easy access to capital provided incredible band-aids for strong and weak companies,” Gelert said. “The big question is whether these companies can improve from the pandemic trauma with this cash, or if it disappears before returning to good health, and need to pay Piper for increased borrowing and future debt maturity. When there is. I can’t be satisfied. “

Forget the fundamentals

One factor that makes a difference is how many cash companies will be procured in 2020 to help them overcome current challenges and see them. For example, Delta and Carnival both raised cash with the addition of leverage. This made it more resilient than the Las Vegas Sands.

All three suffer from sharp declines in earnings, diminished profitability, or fluctuations in losses, and increased leverage. But in Las Vegas Sands, FHR dropped the most. This is because, in contrast to other companies, debt growth did not come with the resilience of increased liquidity. The other two bought time in cash, “Gerato said.

To investors, the market performance of many travel-related stocks appears to be largely separated from Rapid Ratings data. Many have more than doubled from pandemic lows, even though fundamentals indicate that businesses are struggling.

For example, Delta’s share price soared about 125% from its post-pandemic closing price of $ 19.19 on May 15, 2020.Deutsche Bank analyst Michael Linenberg recently Started “catalyst call-by” of stocks In anticipation of rising travel demand, Delta said it was one of the “best quality names in the field.”

reference: More than a quarter of Nasdaq 100 shares are on the bear market — Wall Street sees buying opportunities

But so far, investor confidence seems to be based on what they believe will happen, rather than what airline quarterly earnings and balance sheet reality shows.

Delta Air Lines reported returning to $ 652 million in net income in the second quarter for the first time since the fourth quarter before the 2019 pandemic, but profits were 1.5 billion to profits related to the government’s salary support program. This is due to the inclusion of dollars. Excluding that profit, Delta actually recorded an adjusted net loss of $ 678 million.

Total adjusted net losses in the first half of 2021 were $ 2.94 billion, well below the $ 3.14 billion losses incurred in the first half of 2020, but debt and finance lease debt payments during these periods were 80. It increased by more than% to $ 3.1. a billion.

Still, equities more than doubled, despite a surge in the ratio of liabilities to assets to the highest level seen before Delta’s last bankruptcy exit in April 2007. As the graph below shows, stock prices and debt-to-asset ratios tend to move in opposite directions.

FactSet, MarketWatch

Third-quarter earnings were great — until you look underwater

Source link Third-quarter earnings were great — until you look underwater

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