Four times a year, investors assess the performance of companies worldwide with a fairly standard toolkit: revenue growth, net income, gross margin, free cash flow, debt -- all weighed in comparison to analysts’ predictions and what rivals report.
This earnings season, with the coronavirus pandemic claiming lives and sowing chaos across the globe, those yardsticks are mostly meaningless, leaving the investment community lost in a fog at a time market volatility has hit historic levels.
In March, as governments ordered lockdowns to stop the spread of the virus, the global economy slipped into contraction for the first time since the financial crisis. Expecting the fallout will get worse, ratings agency Fitch said we’re headed toward a “deep global recession.”
Or maybe not, given the unpredictability of the crisis. With little ability to accurately forecast anything from consumer spending to new-home construction, investment pros can’t build reliable financial models.
“Analysts are at a total loss,” said Jean-Louis Sempe, an auto industry analyst with Invest Securities SA in Paris, who -- like almost everyone else in finance -- has been sequestered at home for weeks, with little idea when he might be able to return to the office. “No one ever imagined this could happen, and we just don’t know how it will end.”
That sense of the unreal has spurred analysts to tear up estimates for the quarter ended March 31, which companies begin reporting this week. In one measure of their futility, the average spread between the lowest and highest earnings-per-share estimates for U.S. stocks is at a record high, according to Bank of America.
Armchair Epidemiologists
A fundamental problem is that managers have scant insight into what the coming months might bring. “I don’t think companies know what’s going on,” said Mike Stritch, chief investment officer for BMO Wealth Management. “No one knows.”
Last week, Chip Bergh, chief executive officer of apparel-maker Levi Strauss & Co., pulled annual guidance, took a 50% pay cut, furloughed workers, and then began his earnings call by saying: “The biggest challenge we’re all dealing with right now is uncertainty. How long will this continue? How deep an economic crisis does the pandemic create? How will the consumer respond when the crisis abates?”
Terence Tsang, CEO of Chinese sportswear maker Li Ning Co., last month told reporters, “No one knows when and how big the rebound is if it happens. So it will be meaningless to give top-line guidance.”
That’s left investors and analysts seeking novel ways to assess the financial health of companies. Many are becoming amateur epidemiologists, building new models that include contagion rates, tests administered, and geographic spread. Cowen & Co. publishes an almost daily note on the virus that delves into topics such as infection fatality rates and the under-counting of COVID-19 deaths.