FREE ACCESS April 23, 2020

MorningWord 4/23/20: You never save your way out of recession. You invest your way out

by Dan

A few weeks ago in this space, with earning seasons upon us, in the midst of the most unprecedented health and economic crisis in possibly a century, the narrative among the stock market pundit class had become clear, ignore Q1 earnings results and if companies had not already withdrawn forward guidance, they should, because it is worthless… I disagree, from April 2nd (More or Less… Guidance?). It is my view that investors should have as much information as possible to make decisions as to buy or sell companies equity, and the c-level suite has a fiduciary responsibility to responsibly forecast their business, and not to manage to those forecasts but manage to the best interest of all of their stakeholders. While the recent pandemic has shown us that visibility can go out the window in a near-instant, it will also reveal business models and management’s who rise to the challenge of staying afloat and those that wither under either the sheer weight of the crises and/or missteps by management. I am hard-pressed to believe that companies being more transparent in good times and less transparent in bad times is a good thing for any of their stakeholders which include employees, customers, suppliers, and investors.

On Tuesday’s Fast Money on CNBC I started out our discussion about Netflix’s (NFLX) Q1 results echoing this note:

While we are on earnings commentary…

Yesterday I posted a trade idea from my weekly In The Money segment with Fidelity Investments, detailing a near term bearish view on the etf that tracks consumer staples, the XLP (here).

In that post, I cited a tweet from economist David Rosenberg about the stockpile of groceries Americans have amassed in just the last month

This morning consumer staples and food giant Unilever reported Q1 results, and per the WSJ suggested: “the hit from Covid-19 lockdowns in big emerging markets such as China and India outweighed stockpiling by consumers in the U.S.”

This is a pretty important data point, as we consider the near term benefits to some companies from the unique needs of consumers, but also when weighing pent up demand when things normalize a bit.

The WSJ article went on to highlight some other unforeseen changes (not all bad) to Unilver’s different business lines that can be extrapolated to other consumer staples companies, per Unilever CFO:

-The shift to working from home means people are using personal-care products such as shampoo and deodorant less, he said, estimating 11 fewer uses in a typical week.

-People are cooking more at home, buoying demand for brands such as Knorr soup cubes and Hellmann’s mayonnaise.

-They are also cleaning their homes and washing their hands more, a change executives across the industry have flagged as having long-term potential.

-Online sales—which make up about 6-7% of Unilever’s business—grew 36% in the quarter, as consumers under lockdown ordered more via the internet. Unilever plans to ramp up investments in selling directly to consumers, said Mr. Pitkethly.

-A drop in restaurant traffic, which has hit Unilever’s food-service business, is another change that could last for several months, he said. The business, which supplies ingredients to restaurants, generates annual sales of about €2.5 billion.

-In China, 70% of closed restaurants have reopened but are running at between 50-70% capacity because of social-distancing protocols

Unilever’s ice-cream business, the world’s largest with €6 billion in annual sales, also faces a big challenge. About half the division’s sales are made outside of grocery stores in places like beaches and parks.

This sort of commentary into the second month of the sharpest economic downturn in decades is useful, while the guidance ranges companies may offer are as wide as the broad side of a barn, they are at least guideposts and some of the trends identified by companies can also offer clues as to potential trouble spots but also opportunities. At some point, companies will move from defense to offense, investing in the era of their businesses, that might be in a new world order like we are to see in the post-pandemic economy, Some of the bright spots in tough times are sure to major initiatives coming out of recession, and some of the weak spots might merely be accelerated and those that were meant to fall by the wayside.

As far as moving to a more offensive posture, at some point we will see companies like Unilever lean into what they learned will be positives for their busine3esses going forward, like direct to consumer.

I am reminded by a quote from an Intel (INTC) executive in the throes of the Great Recession in 2009 in regards to their cap-ex plans which has become a mantra at INTC following in the guidance of their former, and legendary CEO Andy Grove:

“You never save your way out of recession. You invest your way,”

This can only be done with buy-in from stakeholders, which can only be done with effective guidance in my opinion.

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