How Resilient Is Your Sector’s TSR? Covid-19 and Its Impact on TSR
May 4, 2020
The spread of coronavirus in 2020 has resulted in the largest global catastrophe since the end of the Second World War. It also may be responsible for the largest economic collapse since the Great Depression. As the virus began to spread through Asia and parts of Europe in the first half of February, and the first death from coronavirus was discovered in the U.S., urgency in the U.S. remained low among government leaders at the federal level, despite the virus being labeled a “Public Health Emergency of International Concern” by the World Health Organization on January 30. As China and other parts of Asia implemented societal lockdowns, global supply chains were put on hold. When impending economic shutdowns became apparent and investor confidence evaporated, the global stock markets became increasingly more volatile and began to crash. The S&P 500 and the Dow Jones Industrial Average fell 12% and 13%, respectively, between February 18 and February 28.
Pandemic Landscape Orientation
“This pandemic is unprecedented and uneven across industries. As an executive compensation and performance firm, we look at a variety of performance metrics appropriate for each industry to determine the performance-based component of pay. With KPIs across many industries falling to levels previously unimaginable during 10 years of economic growth, executive pay will be carefully scrutinized going forward in light of flagging corporate financials and significant equity declines.”Dayna Harris, Partner, Farient Advisors
Between January 1 and the end of March, the median S&P 500 company had fallen 28.1%. However, the impact of the pandemic on share prices has not been uniform. For example, through this same time period, the median Consumer Staples company had fallen by only 13% which, given a normal landscape, would be cause for irate shareholders, but it is not exceptionally bad in the current environment. Comparing that to the median TSR of a Consumer Discretionary company of -43.1%, it’s easy to see that there are some industries that have been more resilient during this disruption. Digging deeper into the question of pandemic resiliency, we explore the Information Technology, Consumer Discretionary and Energy sectors below.
Through the end of March, the Information Technology sector had taken a large hit in line with the overall S&P 500, falling 23.9%. Even within the sector, performance has varied significantly. Through the end of March, the Software & Services companies had a median TSR drop of only 17.9%, compared to the Technology Hardware & Equipment companies that saw a median drop of 29.0%. Pandemic-related shutdowns have choked the supply chains that Technology Hardware & Equipment companies rely on while Software and Services companies are able to produce and distribute their product completely, digitally and in a decentralized way. Furthermore, the software group may be insulated from volatility due to companies’ subscription-based revenue models.
Consumer Discretionary companies have struggled during the crisis. With almost every state issuing “shelter in place” orders, general public spending has declined or vanished for a majority of ordinary goods and services. Through April 1, Consumer Discretionary companies in the S&P 500 had a median TSR of -43.1%, which is second worst only to the energy sector.
Although all the industry groups within Consumer Discretionary have performed below the S&P 500 median, there is variance. The Automobiles & Components and Consumer Services industries have median TSRs of -51.5% and -49.0%, respectively. The Retail industry group performed the best with a median TSR of -35.5%. While most of the Retail industry has mastered online purchasing and delivery, automobile companies, for the most part, have historically relied on in-person vehicle purchasing, which is non-existent in a pandemic environment. We are seeing traditional dealers and manufacturers move to this low-touch purchasing model already in use by companies such as Carmax (KMX) and Carvana (CVNA). General Motors (GM) has introduced its “Shop. Click. Drive.” campaign and Fiat Chrysler (FCAU) has launched its “Drive Forward” initiative.
Of all sectors, Energy has been hit hardest during the pandemic. Through April 1, the median energy company had fallen 61.5%. Demand for energy, particularly oil, has dried up as shipping, travel and overall transportation has slowed globally. Compounding the slowing demand, leaders from Russia and OPEC have failed to reach an agreement on oil production quantities. OPEC subsequently removed all self-imposed production limits, driving down the price of crude oil. On April 20, the price of a barrel of crude oil fell to $40 per barrel, the lowest price since the New York Mercantile Exchange began trading oil futures in 1983. The compounding effect of these two events will undoubtedly make for a longer, more difficult recovery for the Energy sector, but it could have a positive effect on other industries that generally benefit from low energy prices, including airlines, chemicals and shipping.
April’s TSR Recovery
The market began its long climb back in the first half of April. Every sector median in the S&P 500 has had positive returns with some exceptions. Although share prices are still far from where they were before the onset of the pandemic, April shows early signs of market confidence in the government’s $2T stimulus package. This TSR bounce-back comes despite worsening signs of pandemic impact: U.S. case count approaching one million, unemployment rising at unprecedented rates and no clear coordinated effort across the country on the horizon for mandated shutdowns or reopening of the country. At this time, it is too early to have a clear picture of what a recovery might look like or when it will happen. Pandemic experts have models that forecast months to years until stability is restored. In times of economic uncertainty, companies must reorient themselves to the new landscape to ensure the sustainability of the business over the long term.
Business conditions and equity prices have eroded over the past six weeks. Farient recommends that business leaders and boards of directors consider the following as the world moves forward during these challenging times:
- Stakeholders – including investors, employees and communities – are paying close attention to how companies are addressing all issues of the pandemic from executive compensation to human capital management.
- Going forward, it will be important to ensure that stakeholder interests are aligned with executive interests. Farient encourages companies to avoid:
- Windfalls of equity when the market turns around
- Dilution of equity due to depressed prices
- Discretionary or other awards that unevenly benefit executives
- Disclosures will be more critical than ever. Engage with your investors. Clearly discuss what decisions you are making and how they support the future of the business.
Finally, don’t panic. Take a measured approach. Like most crises, this too shall pass, and it will be important to have made the right decisions at the right time.