Q3’20, Q4’20 and calendar 2021 consensus estimates need to come down. Why? 21% unemployment (U6 measure), permanent economic damage that businesses suffered (and will continue to suffer), as a result of the shutdown, the COVID “back-to-work tax”, the threat of a second COVID wave, geopolitical risk, record debt levels and social unrest have created more economic uncertainty than any time I can remember. These inputs translate to slower growth and less visibility for companies as they look into the second half of 2020 and calendar 2021. The 2H 2020 and 2021 “hockey stock” recovery baked into consensus estimates is unwarranted.
See videos of a “reopened” New York City, Powell’s comments and COVID’s impact on stadium venues below.
Realistic commentary from the Federal Reserve. On Wednesday afternoon Federal Reserve Chairman Jay Powell held his FOMC press conference which put forth the first bit of realistic economic commentary that we have heard out of Washington in recent months. Powell’s commentary was a welcome counterweight to the Trump Administration’s persistent promotional comments which amount to little more than general election positioning.
A red-lined equity market powered by retail traders and Fed policy. Wednesday felt like peak bubble to us. This recent run up in equities since the second half of March has resulted in an equity market with a risk/reward profile worse than 1999’s Internet bubble. 1999’s economy was in decent shape whereas today’s frothy market sits on top of an economy that while improving remains in a difficult spot.
There’s little that fiscal and monetary policy can accomplish in terms of spurring consumer demand when 21% of Americans are out of work. Real GDP will take approximately two years to recover per the CBO.
These concerns hardly frightened retail investors who plunged into stocks highly weighted to the recovery. Debt heavy, under-capacity airlines (tkr: AAL), bankrupt car rental companies (tkr: HTZ) and empty, real estate-heavy movie theater chains (tkr: AMC). Not to mention our favorite “you know you’re in a bubble when” stock Nikola (tkr: NKLA), which has zero revenue and sports a $22 billion market cap. See our recent article “The Rise of Fractional Share Trading,” for additional color.
Second half 2020 and 2021 consensus estimates need to be revised downward. We spot-checked consensus estimates across the Software industry as well as across other sectors. The insight we gleaned is that Q2 consensus estimates appear to be sufficiently conservative. However, Q3’20 consensus estimates appear to be slightly aggressive. Q4’20 and calendar 2021 consensus estimates register as aggressive from our perspective as they imply close to a normal operating environment and demand levels. We generally expect companies to report in-line 2nd quarters but expect soft bookings activity and lower guidance for 2H 2020 (to the extent forward guidance is provided). We believe many analysts will be required to lower Q3’20 estimates and certainly hockey stock Q4’20 and calendar 2021 estimates.
Why do we have a bearish view? We believe investors underestimate:
- Economic disruption: Significant operational and financial disruption has occurred and will continue to damage small, mid-sized and large businesses as a result of the COVID shutdown;
- Punitive expenses: Material costs associated with reopening in compliance with COVID (the “COVID tax”); and
- Weak consumer demand: the lack of consumer demand for discretionary items (given the 21% unemployment rate) will ensure a slow recovery as companies shrink, file for bankruptcy and as fiscal stimulus expires (even a second stimulus event will eventually expire and likely will do so well before the U.S. economy achieves a full recovery).
That’s to say nothing of record corporate debt levels, a trade war with China, risk of a second COVID wave and social unrest all of which impair visibility, increase uncertainty and potentially harm productivity.
For example, how would Live Nation (tkr: LYV) execute and absorb the cost associated with a Taylor Swift world tour when:
- Social distancing requirements limit the number of fans (if any), that may attend a live gate;
- Fans may not have the discretionary capital to participate in-person or as a pay-per-view;
- Litigation risk – promoters fear the risk of litigation from concert attendees were they to contract COVID and blame the promoter;
- Global travel is limited;
- COVID social distancing rules of engagement vary by city, state and country and therefore complicate preparations.
This lack of live event activity will have a spillover effect and negatively impact venue owners and business partners who service those events. The long-term answer may be that global entertainers move to Netflix (tkr: NFLX) or Disney (tkr: DIS) and become part of a larger, direct-to-consumer subscription package much like Spotify (tkr: SPOT) has done with top podcasts. However, these disruptions and machinations are messy and take time to resolve.