Earnings season to reveal true impact of pandemic on companies
Ahead of earnings season, Allan Gray thinks the market is making a “gross exaggeration” to the economic impact of the pandemic on companies.
While it expected firms to report loss of earnings, the firm felt losing one year of earnings did not justify the hits to a company value, particularly if the company only had minimal debt.
Portfolio manager Simon Mawhinney said: “There are companies trading at levels very close to, and in some cases below, their March 2020 lows and those companies, we believe are the ones to watch.
“These companies have been affected by COVID-19. Their earnings are depressed, if they even exist at all. But this needs to be seen in context. The true economic impost for a company that would have traded at 20x earnings, which loses one year of earnings in a market where things revert to normal after a year, is one twentieth or 5% of that company’s value.
“If things do get a little bit worse, some companies will make losses, which needs to be taken into consideration as well. But to think these companies are worth half of what they were this time last year, despite not having a lot of debt, seems like a gross exaggeration.”
The companies which were most at risk were those which had a combination of operating and financial leverage such as banks as they depended on the companies they lent to being solvent.
“Reporting season will give much more colour on the question of solvency and will highlight those companies most exposed and what their prospects might be,” Mawhinney said.
AUTHOR
Laura Dew
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