Yesterday marked the beginning of earnings season for the January/March 2020 quarter. Such backward-looking data does not tell us much about what is happening now or what may happen in the coming months, but we can glean bits of information about the health of corporate America.  Below are several bullet points – things you can listen for in what companies report – while you ignore the scary headlines the media will serve up each day.

  • This morning two banks reported – JP Morgan and Wells Fargo. Not surprisingly earnings were lower than last year, part of that the result of the banks increasing their reserves to cover loan losses. We’ve known for weeks that some borrowers could be in trouble as the result of the stay-at-home orders, so seeing increasing loan-loss reserves is not a surprise. What is encouraging, however, is that unlike the 2008/09 crisis where the banks experienced real problems when raising loan-loss reserves, this time banks are in a much better place to be able to make the necessary adjustments without causing problems for themselves. The other encouraging news is that both of these banks earned enough to keep paying their dividends. While many banks have paused stock buybacks, the question of dividend payment was a bit of an open question. At least for these two banks, they are likely to be able to continue their dividend payments.
  • Watch for earnings from companies like Walmart, Amazon, Proctor & Gamble, Clorox, and others. Preliminary indications from these companies suggest a sales boom as a result of the crisis. Sometimes circumstances cause sales to be pulled forward, resulting in a boom followed by a bust in a subsequent quarter. I would not expect that from companies like these. Instead I would expect sales to gradually return to more normal levels as the country opens back up. If you bought extra peanut butter or toilet paper because the entire family was at home for a month, that doesn’t mean you won’t have to buy those things in the future. Instead you are likely to go back to pre-crisis levels.
  • Companies like Starbucks, Yum Brands (KFC, Taco Bell, Pizza Hut), Tiffany, LVMH (Louis Vuitton, Fendi, Hennessy and others) will likely see a significant decline in sales in many countries in which they operate. But listen for how these companies talk about countries that are further along than we are. About a month ago, the CEO of Starbucks talked about their operations in China. He described how those stores were coming back online and how the company was using their experience there to plan for the United States and Europe. He was very encouraging.
  • Instead of focusing on iPhone sales, use Apple as a gauge for how well companies are managing their supply chains, especially those supply chains coming out of China. Yesterday, China reported exports for March and while they were lower than previous quarters, they were not as low as many expected. Also listen for Apple to talk about its services business. Like Walmart and Amazon, did Apple benefit by selling more apps and services as a result of people staying at home?
  • Medical and pharmaceutical companies are certainly in the spotlight, with many working furiously on treatments, testing, or a vaccine. Johnson & Johnson reported yesterday afternoon and cautioned about earnings for the remainder of 2020. But they also raised their quarterly dividend by over 6%. That’s pretty impressive! What can we learn from others?

The market seems to be trying to figure out what happens next and what that means for corporate profits. The market is up over 25% from the low we hit on March 23rd but still about 17% below the all-time high.  Whether or not we retest that March low remains to be seen – I wouldn’t try to make that call. I also wouldn’t try to make a call as to when we reach all-time highs again. But as I mentioned in a previous post, I think the sell-off was overblown. Stocks are valued by their expected cash flows over many, many years to come and even a significant slowdown for a quarter, or two, or three, does not translate into a 34+% reduction in a company’s value.

I firmly believe in corporate America’s ability to weather this storm, to innovate, and to prosper.  And while we don’t know exactly what to expect or when to expect it, I do believe we will again see all-time highs in the markets down the road.

Let me know if you have questions or would like to chat. Stay healthy!