Whether a business comes out of the pandemic stronger or not depends on savvy planning—plus a good bit of luck.
The world economy already looked a bit wobbly before the coronavirus hit. Now, according to Economist Intelligence Unit (EIU) forecasts, it looks as if the global economy will contract this year by 2.5%, marking the deepest recession in modern history. Brazil will be the hardest hit, with GDP expected to shrink by almost 8%, the EIU says. Individual businesses are grappling with how to get through the lockdown and prepare for what may be a significantly different future.
While many were hoping for a V-shaped return to normal economic activity once the virus comes under control, a quick recovery is not in the cards, says Cailin Birch, global economist for the EIU. “We’re expecting a lot of hesitance on the consumer demand side, particularly as it regards travel,” she explains. “Then on the output side we’re seeing supply chain disruptions across the range of consumer goods, including in high tech sectors, where China is a critical provider.”
At the same time, recovery will be staggered across the globe, as the virus manifests over time, she adds. “China and the rest of Asia have been the hardest hit in Q1, but the crisis is going to roll from region to region as the disease spreads.”
Which companies will come out ahead? Much comes down to the health of their balance sheets. That’s no problem for cash-rich global behemoths such as Apple, Google, China Mobile, Hon Hai Precision Industry and Samsung. Plus, there are plenty of cash-rich investors waiting for the right opportunity to buy.
“Just before the crisis hit, S&P 500 companies had upward of $2 trillion in cash on their books; and this may be the saving grace in all this,” says Howard Johnson, M&A managing director at Duff & Phelps. “Private equity firms are also flush with cash. So there’s roughly $1 trillion worth of dry powder sitting around.”
Companies with a strong balance sheet will come up even stronger, he believes, as weaker competitors fall by the wayside. “Those [cash-rich] companies will be ready to enter the M&A market with a lot of opportunistic buying,” he says. “Smart acquirers will have the advantage of seeing a very quick transition from what was a seller’s market in 2019 to what will be a buyer’s market by the end of 2020.”
Looking at sectors, certainly travel and live entertainment—including airlines, cruises, casinos, hotels and theaters—have been perhaps hardest hit. By mid-March, the Baird/Smith Travel Research Hotel Stock Index, tracking the market cap of the world’s largest hotels, had fallen by nearly 50%. Prospects for recovery in leisure travel are muted.
|
After |
Before |
|
| India | 2.1 | 6.0 |
| China | 1.0 | 5.9 |
| Turkey | -3.5 | 3.8 |
| Brazil | -5.5 | 2.4 |
| South Korea | -1.8 | 2.2 |
| USA | -2.9 | 1.7 |
| Russia | -2.6 | 1.6 |
| Mexico | -6.5 | 1.1 |
| France | -5.0 | 1.0 |
| Germany | -6.0 | 0.9 |
| Japan | -1.5 | 0.4 |
| Italy | -7.0 | 0.4 |
| Source: : Derived from EIU forecasts as of April 19, 2020. | ||
For companies producing consumer discretionary products like washing machines, automobiles, boats and household furniture, Refinitiv analysts expect earnings to drop by 18.1% in 2020. Others will be even harder hit. Industrial earnings will likely decline by almost 25%; and, as oil prices tumble, energy producers are bracing for earnings losses of a whopping 75%.
Companies like Midwest Industrial Supply have adjusted earnings expectations dramatically, anticipating the worst year on record. Midwest is a privately owned US-based company providing rail lubrication, dust control, soil-stabilization and related services to mining, construction, mass transit and other heavy industries. At the best of times, forecasting revenues beyond a three-month horizon is a challenge, explains CFO Mark Schoolcraft: “To a large degree, demand for our services depends on factors beyond our control, like commodity prices, raw-materials demand and anything else that impacts industrial production. Seventy percent of our revenue also happens May through September; so if sales soften then, we have little hope of saving the year.”
Midwest has begun doing more complex forecasting, combining historical data and linear regression models with predictive analytics. “The challenge this year, however, is that the impact of the virus is still an unknown,” says Schoolcraft. “It comes with effects that history won’t tell us.” Although mainly serving the North American market, Midwest recently saw one of its European projects—a large roadworks construction near Venice—indefinitely postponed due to the pandemic.
However, the coronavirus has fueled demand in some sectors, most notably health care, technology, consumer staples and utilities. For example, at Tente Casters North America, the US division of a global castor-manufacturing conglomerate headquartered in Germany, medical supply sales have skyrocketed. Tente makes, among other things, wheels for hospital carts, beds and other health care related equipment.
“Since the global pandemic took hold on our economy in early March, our order intake is up over 252% in just four weeks,” says CFO Pierce Kohls. March 2020 nearly beat the company’s prior record for sales, and the impact on operations has been significant too.
“We have rearranged production lines, changed shift schedules, and taken drastic measures to increase the cleanliness of our office and plant, so we can keep our employees safe while we keep up with demand,” Kohls explains. “Even so, our product availability is shortening daily while our lead times go further out. [The virus] has forced us to shift our resources to focus on medical projects and has us reaching out to other suppliers that can provide us component parts, even if it means at a higher cost.”
Some companies are laying off workers en masse. For example, Hertz announced April 20 it would lay off more than a third of its 29,000 employees in North America. Meanwhile, even deeper job cuts will hit the global airline sector. On March 16, Norwegian Air announced the temporary layoff of 90% of its workforce, amounting to 7,300 employees.
However, Tente is scrambling to hire. “We’re actually looking at adding an additional 15% full-time equivalent to our workforce right now—just because of the order intake that we’ve had this month,” Kohls comments.
One question separates those that are benefiting now from those that will benefit in the wake of recovery: Will impacts related to social distancing fade once restrictions are lifted? Many believe that this pandemic will be a catalyst, a tipping point, for lasting and widespread adoption of new behaviors.
“The patterns of demand are changing,” says Colin Keaney, CFO of Dell Financial Services (DFS), the leasing arm of Dell Technologies. “Organizations we serve, such as educational institutions, are changing their model to teaching online; and folks are setting up capability at home—laptops, desktops and peripherals. This sparked a great demand for our technology, as you can guess. Subsequently, we’ve also seen a change in demand for our financial services.”
In addition to increased demand for the company’s traditional longer-term lease products, DFS has seen a burst in demand for shorter-term, on-demand lease products. “Most of our financing is over a three- to four-year time frame. But at this time, customers don’t know exactly what their needs are at the moment. They’re interested in acquiring a technology for a six- or twelve-month period, until they really understand how this whole situation will play out. Similarly, Dell Tech on Demand, which is usage based, is expected to be well positioned for the foreseeable future,” Keaney comments. “There’s been a lot of industries where the whole profile of the business has changed substantially. So, by us having a full suite of products that are based on consumption, we’re well positioned to serve those customers.”
