Some consumer firms may take nearly 5 years to recover: CIBC report
The consumer-facing companies that will be hardest-hit by the COVID-19 economic shutdown could take nearly five years to reach the earnings-per-share levels they posted in 2019, according to a new report from the Canadian Imperial Bank of Commerce.
A group of analysts led by Mark Petrie ran each of the 27 Canadian consumer companies the bank follows through three scenarios for a recovery in household spending to estimate how the downturn could affect each one. CIBC’s optimistic case sees household spending returning in the second half of 2020, while its pessimistic scenario only sees a recovery in 2022. Its base case falls right in between.
Using the base case, CIBC estimates that some of the staples it follows such as the grocers Loblaw Companies Ltd., Metro Inc. and Empire Company Limited, which operates Sobeys, will report higher EPS in 2020 than they did in 2019.
Discretionary companies won’t be as fortunate.
Companies such as BRP Inc., Leon’s Furniture Ltd. and Sleep Country Canada Holdings Inc. will need 4.5 years to reach 2019 EPS levels again, Petrie calculated. Even some of the sector’s more highly touted stocks such as Dollarama Inc. will need a full year of recovery while Restaurant Brands International Inc., which operates Tim Hortons and Burger King, will require nearly two.
Most of these companies have seen their stocks shed more than 40 per cent of their value since the beginning of the year.
But that doesn’t make them any less attractive to Petrie.
“Our favourite stocks generally reflect companies that are hit hard in the shutdown — and have seen shares punished — but that we expect will perform relatively better in a recession,” Petrie wrote.
It’s clear — whether by looking at their EPS estimates or their stock prices — that the grocers have been the winners so far in an environment where they, unlike nearly every other consumer company, are essential. These stocks, however, are not among Petrie’s favourites going forward because their upside only appears to be modest.
Instead, Petrie identifies Restaurant Brands and Alimentation Couche-Tard Inc. as his top picks, with names such as Aritzia Inc. and Canadian Tire Corporation Ltd following behind.
What unites these four companies is that Petrie isn’t concerned about their balance sheets. Restaurant Brands and Canadian Tire may be heading for elevated net debt to EBITDA ratios of 5.3x and 5.6x respectively under CIBC’s base case, but both are on more solid ground beneath the surface. Restaurant Brands recently amended its debt covenant to a $1-billion minimum liquidity constraint and Petrie doesn’t expect it to be tested. Canadian Tire looks highly levered on a consolidated basis, Petrie admits, but “each segment has healthy capital structure for its industry.”
Strengthening the group’s investment thesis is that it appears to be more insulated against the downturn than other staples and discretionary companies. Tim Hortons and Burger King continue to operate locations and generate revenue through a solid presence in drive-thru and a growing one in delivery. Couche-Tard locations are open and while the company has taken a hit in fuel volumes, it will be partially offset by record high fuel margins and increased sales in alcohol and tobacco, Petrie said. Outside of Ontario, Canadian Tire locations are also still open.
Aritzia is the only company in the group that is not deemed essential. Petrie, however, points out that the women’s fashion company generates the bulk of its earnings in the second half of the year and so a shutdown in spring is less threatening to its future.
There are still several unknowns clouding the future of consumer companies, Petrie said.
He questions whether working from home will lead to different consumer patterns around buying food, for example, or how long consumers will delay purchases of big-box items such as mattresses, cars and luxury goods.
“Given the magnitude of this crisis, it seems safe to say that many things will not just go back to ‘normal,’ but only time will reveal the full implications,” Petrie wrote.