Below we detail five observations based on first quarter US corporate earnings releases.
- Tale of Two Quarters. Earnings releases for the first quarter are a reflection of a relatively stable January and February followed by a sharp and sudden drop in activity in March due to stay-at-home orders. Overall, earnings per share for companies in the S&P 500 index declined 14% year-over-year, the weakest pace of growth since 2009. That said, we observed revenue and profit margin growth dispersion by sector. Consumer Staples companies that benefited from stockpiling and those facilitating remote working (particularly Information Technology) fared better than companies in sectors directly impacted by social distancing measures, with Consumer Discretionary firms involved in tourism and leisure activities experiencing a pronounced decline in demand. Strength in the US dollar amid riskoff market sentiment and safe-haven flows also impacted earnings for multinational companies, while a collapse in oil prices—with Brent oil averaging $50.8 per/barrel in the first quarter relative to $63.0 a year earlier—weighed on Energy-oriented companies.
- Capital Conservation. Faced with an economic downturn induced by measures required to address the health crisis, companies have drawn on revolving credit facilities, raised capital through new bond issuance and started to scale back spending on capital expenditures, share buybacks and dividend payments. US investment grade corporate bond issuance exceeds $1tn year-to-date, far outpacing the $540bn of new supply seen in 2019. We’ve observed a gentler pace of new issuance activity in US high yield markets. Mergers and acquisitions activity has also declined. We expect this to continue in the near-term. We view these capital conserving behaviors as an appropriate response, though the degree to which they have been implemented varies by sector and company. Overall, cash balances for investment grade rated US companies are higher relative to a year ago and we are closely monitoring what companies decide to do with these elevated cash balances.
- Higher Leverage. A combination of lower earnings and higher debt levels (as companies issue new debt to shore up liquidity) has led to higher gross leverage ratios. Net leverage ratios have increased, though at a more modest pace due to many companies retaining proceeds raised during new issues on balance sheets. We see both measures of leverage trending higher this year, reflecting continued declines in earnings before interest, taxes, depreciation, and amortization (EBITDA) alongside ongoing new debt issuance.
- Elevated Uncertainty. As of May 11, 180 US companies had withdrawn earnings guidance, citing elevated uncertainty. During earnings calls, few companies said they expect a Vshaped rebound in economic activity, with more firms anticipating a U- or L-shaped recovery. Companies with higher exposure to travel and in-person interactions foresee a longer stretch of time before activities return to pre-crisis levels. In contrast, companies in construction, business supplies and data centers expect a swifter resumption of activity.
- Accelerated Adoption of New Technologies. Remote working (and living) has led companies to accelerate digitization and automation plans. Online activity has skyrocketed due to social distancing measures; e-commerce has been a clear beneficiary. Telemedicine providers and communication platforms that facilitate working-from-home have also experienced increased demand. Many of these secular shifts were already underway and will likely remain at fast-forwarded levels as we progress to the recovery.