Last week was also a little light in earnings calls and conferences but looking ahead, we see a deluge of earnings calls in the next few weeks as companies report Q2 earnings. The key takeaway this past week has been that there is a modest but fragile recovery underway in several hard-hit sectors. Let us examine this in detail.
A Modest Recovery
What we are seeing is a modest recovery as some parts of the world reopens. The sharp rebound as economies re-open has now turned into a slow recovery phase. Some sectors are also recovering slowly driven by what management teams see as pent up demand. The chart below from Goldman Sachs seems to indicate the modest recovery in areas like auto traffic search and department store spend.
We have been seeing this for a couple of weeks now but travel seems to be rebounding faster than people expect:
We also believe that the return to travel can come possibly much more quickly than a lot of people expect. In fact, some of the destinations and hotels in 2021 are already seeing much higher occupancy rates. And as you can imagine, after 3.5 months of most people being stuck at home, they are all eager to travel again. So, we are actually seeing and we have seen already for the last two months that our members are very excited to travel again, and we see that in the demand that has accelerated from April to May and to June. So I think yes, the travel industry could possibly recover much more quickly than people expect right now.” – Travelzoo (TZOO) CEO Holger Bartel
With rising infection rates in the US and around the world, there is a lot to worry about. The markets seem to be stable though despite this probably because this is is not translating to higher fatality rates. BlackRock (BLK) CEO Larry Fink seems to think that the market is “probably a little ahead of itself at this time”. Why?
…because I still believe we are witnessing real tragedies in the small and medium businesses. What’s remarkable is there are more human beings being affected by the disease today than on March 21 when markets were 40% lower – BlackRock (BLK) CEO Larry Fink
“There is still 20 million people filing for unemployment benefits on a weekly basis. And there’s still a lot of people who are not going back to work. So there’s going to be some companies, you’re going to have to downscale or right-size their businesses” – Palo Alto Networks (PANW) CEO Nikesh Arora
The IMF expects global growth to be minus 4.9 percent in 2020 with 5.4% growth expected in 2021. This is in line with what some companies are seeing in terms of a recovery in 2021:
“The signals that we are getting from our customers, our partners, the OEMs and the suppliers is that they are pushing back discretionary expenditure they are holding on for cash, but they see the market recovery in 2021 and beyond and they believe in the growth of the industry.” – IHS Markit (INFO) EVP Transportation EVP Edouard Tavernier
Restaurants and hotels rethink their operations
The restaurant industry is trying to adjust to the impact of the pandemic which has hit its business model hard. Many are struggling and with some filing for bankruptcy. For perspective, in a survey of 24,000 restaurants, Yelp found out that around 53% of the restaurants have permanently closed:
Those that remain are having to rethink their operations and streamline their operating model. Some of the areas where consensus is building is around doing away with housekeeping and having people make their own beds at hotels and on one entering your room for the time you are staying there, according to Park Hotels & Resorts (PK) CEO Thomas J. Baltimore. This means doing away with room service and buffets. There will also be contactless checking in and introducing temporary barriers between tables. Ark Restaurants is initiating contact tracing where you have to leave your phone number when you come to dine and they can trace you and the people you came in contact with, in case any of you become ill. These are all in a bid to make the customer feel safe when they come into the restaurants and hotels
Some of these measures may results in incremental costs while others like the elimination of room service which is not usually profitable are good for the bottom line. This is important to note if you seek to invest in this area.
Digital adoption accelerates
A key theme has been the accelerated digital adoption as companies are forced by the pandemic to move online to serve their customers. Nike (NKE) CEO John Donahoe calls it “a true step-function change”. Investors may feel like they have missed out on this period of change but what we understand from listening in to management teams is that we are only in the early stages of this transformation and there is still time to catch the train:
“…the paper to digital transformation, if you think about it, is still very much in its early innings. There’s not a CIO I talk to now that is not working very quickly on digitizing on archaic paper-based processes and that obviously is a huge accelerate. With CIOs maybe four months ago, you’d get involved in the conversation, say, yes, yes, I need to do that, but I have these other 13 projects that I view as more mission-critical in the short-term to get over the line…whether you’re individuals, you’re a CIO, you’re a small business, digital is the – this is the digital hour. Digital as the buzzword of the day to continue transforming your business and even to get just baseline business continuity in a more challenging environment” – Adobe (ADBE) EVP and General Manager, Digital Media Bryan Lamkim
“…the pandemic is happening during a period of exponential technology change, which was already driving entirely new ways of doing business. In our future systems research last year, we identified that the top 10% of companies in terms of tech adoption, depth and culture who are the leaders, are performing twice as well and is the bottom 25%. We believe COVID immediately widened that gap. We see the leaders doubling down on their investments, while the laggards recognize the speed to accelerate the pace of their transformation.” – Accenture (ACN) CEO Julie Sweet
“The second trend we are seeing is that digital transformation is accelerating. You probably have heard this from other CEOs, and I’ve said several times before that, that we believe the enterprise of the future will be uncensored cloud-enabled and data-driven. That is a reality today.” – Hewlett Packard Enterprise (HPE) CEO Tarke Robbiati
The biggest beneficiaries of this digital transformation have been cloud and cloud security. Although we have seen increased revenues in cloud companies, the numbers have not been going up in cloud security companies. Interestingly, we gathered from the Palo Alto Networks (PANW) CTO Nir Zuk that most companies chose to take trial runs of their cloud security and those may be coming to an end soon and they need to decide to upgrade. Therefore, expect the see some uptick in revenues in these cloud security providers as this happens. As said earlier, the cloud is just getting started and would be wise to be positioned to take advantage of it:
“The transition to a more digitally-driven future, which was already taking place, is accelerating at a pace few would have predicted three months ago. More firms are moving to the public cloud and upgrading their data and technology faster to meet the needs of a virtual workforce, manage volatility and continue to adapt, evolve and compete.” – FactSet Research Systems (FDS) CEO Philip Snow
“…everybody’s realized that employees need to work from both the office and their home in an effective matter. So..I think it is becoming visible that more and more customers are contemplating, moving a lot of their back end infrastructure to the cloud as evident in the success of the cloud service providers” – Palo Alto Networks (PANW) CTO Nir Zuk
“We’re going to live in a much, much larger distributed environment, where ubiquitous connectivity will be essential, as essential as water and electricity are. And you must be secure. Therefore, we have to understand that security is a big aspect of the overall environment.” – Hewlett Packard Enterprise (HPE) CFO Tarke Robbiati
In sum, we are seeing a modest recovery in the economy in some sectors. Restaurants are rethinking their models while cloud and cloud security are in their early innings. That’s all we had for this week. We are excited about the upcoming flood of earnings reports in 2-3 weeks.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.