New Corporate-Speak
Paul Markham, global equity portfolio manager at Newton Investment Management, which oversees $66 billion, says liquidity is crucial in a period when earnings are so artificially depressed. He points to free cash-flow yield, a measure of money coming into a company’s bank account, as a good way to assess whether management can keep meeting obligations like debt payments.
“Much more important to us is to understand the debt dynamics of a company, how much outstanding leverage it has on its balance sheet, and directly related to that is the free cash-flow yield,” Markham said.
Corporate quarterly reports and conference calls typically focus on acquisitions, store openings, new products, and other measures that might augur faster growth. Now, a key element of corporate-speak is “balance-sheet health” -- proving you have enough money to ride out the pandemic.
That means cost cutting will be front and center, but not just reductions in capital expenditures, dividends, share buybacks, and payroll. In the past, most companies would seek to downplay reports that they’re violating lease agreements or not paying rent, because such moves can mean insolvency is near. These days, once-proud companies are trumpeting it.
No Rent
Dallas-based restaurant chain Dave & Buster’s Entertainment Inc., which has temporarily closed all locations, said April 2 that to reduce its “shutdown period expense burn rate” -- an obvious candidate for one of this era’s new metrics -- it had notified landlords that it didn’t plan to make April rent and didn’t say if it would ever pay it.
With so much of the market flying blind, those who get creative on data gathering and analysis can reap outsize rewards. Since long before most people thought of corona as anything other than beer, sophisticated investors have sought out alternative data points: They might examine satellite images of parking lots to track shopping-mall visits or use artificial intelligence to parse social media for clues about increased interest in a product.
Sam Poser, a footwear analyst for Susquehanna Financial Group, makes the case that how much companies share the pain during the pandemic should matter to investors. He pointed out in a research note that executives at Under Armour Inc. took a 25% pay cut, and those at Caleres Inc. did 20%. Though the salary reductions sound like a lot,- both companies furloughed thousands of workers. Meanwhile, executives at some competitors have taken deeper pay cuts or are going without salaries altogether.
Under Armour and Caleres will likely experience a mass exodus of talent during the crisis as employees look for other opportunities, according to Poser. That means after the virus fades they’ll need to go on a hiring binge -- at great cost.
“Honestly, I don’t think what people say about current trends is that important,” Poser said. “The real story is who in this crisis is enhancing their brands. Treating people right and doing stuff to support the cause is a winning situation.”
— With assistance by Sarah Ponczek, Claire Ballentine, Vildana Hajric, Elena Popina, and Ville Heiskanen.