It’s likely that not all of the earnings downside -- which keeps coming as the Coronavirus keeps raging -- is priced into retail and manufacturing stocks.
Those are some of the hardest hit sectors on their fundamentals in this crisis.
For retail, shoppers, many of whom are laid off or will be laid off, are dashing for essentials, a boon to staples stocks. But discretionary spend is vanishing as income streams do the same and people keep social distance. Retail store closures are the biggest factor leading analysts to keep lowering earnings estimates.
The manufacturing sector is having a supply and demand shock, as economic activity halts and manufacturing plants close. Some may be slowly opening in Asia, but of course, Asia will have a recession if there are no global partners to sell to.
The Institute for Supply Chain Management said Wednesday manufacturing activity declined year-over-year for the past several months, with a reading of 49 (below 50 is a decline). Many point out that the number will worsen in the coming months as the next batch of data encapsulate more time in which the country was impacted by the virus.
For both of these sectors, negative sales growth combined with fixed costs that must be paid are leading to operating margin contract declines, so the earnings decline will be greater than revenue declines.
For retail, "Our estimates and price targets across our coverage are being updated to take into account the negative impacts from the Coronavirus on sales and margins. Our revised estimates take into account many of the evolving global containment efforts, store closures, cash-flow dynamics (liquidity), buybacks suspensions, and workforce furloughs, though the situation continues to evolve on a daily basis,” wrote Wedbush Securities analyst Chris Svezia in a note. For retailers, store closures could result in comp declines of up to -20% for 1Q (including ecommerce offsets).”
For manufacturing, Morgan Stanley analyst Courtney Yakavonis cut earnings estimates by more than 10% in a note Tuesday on several companies. Her Wednesday comment on the manufacturing data: "This March reading is largely based on January and February data points and therefore reflects the pre-COVID-19 trends.”
Plus, some analysts are beginning to use lower multiples on forward one-year earnings estimates, as 2021 is looking bleaker than previously anticipated (although still positioned for growth). The economic fallout could create a U-shaped economic recovery, rather than V-shaped, even with monetary stimulus.
Debt burdens could climb too, pressuring credit ratings, as credit spreads remain wide even with the Federal Reserve’s action. That is a negative factor for valuations. And for companies with maturing debt soon, there’s a cash crunch possibility.
Svezia sees Dicks (DKS) 2020 earnings per share coming in at $2.55, versus a previous estimate of $3.87. His new estimate is 12% lower than consensus.
Svezia may be behind other analysts, but his far lower estimate may also indicate that he is indeed ahead of the pack.
Dicks is trading at just under 7 times next year’s earnings (2021 estimates are lowered by Svezia and Wall Street as well), which is far below its 5-year average, but also far above its 5-year low of 3.7.
The stock is down 62% year-to-date, while the S&P 500 is down just 20%, so the stock may already be priced for doomsday.
Svezia is looking for EPs for 2020 of $3.62 for Foot Locker (FL) , lower than his prior estimate of $5.10 and below the consensus view of $3.86. By Wedbush’s view, there is 6% downside to earnings.
Foot locker is trading at an incredibly low 5.5 times 2020 earnings, still above its 5-year low of 3.8 times, as the stock is down 49% on the year.
Svezia sees EPS for 2020 coming in at 2 cents, rather than 25 cents for Under Armour (UAA) , while Wall Street had already forecasted 3 cents. Still, Svezia’s estimate reflects 33% earnings downside from here.
The stock trades at an abnormally high 99 times forward one-year earnings, as 2020 was always expected to be a big down year, while 2021 may be a rebound year. 2019 EPS was 34 cents.
Importantly, the stock is down 57% year-to-date.
Caterpillar still trades at above 14 times 2020 earnings, as it shed more than 4% to $111 a share Wednesday. That’s not a high multiple, but it’s capable of falling below 9 times, based on the last 5 years.
Yakavonis also cut estimates on industrials John Deere DE and Cummins (CMI) .
Analysts —specifically these two — note that companies may cut dividends and capital expenditures further in order to save free cash flow as much as possible.