COVID-19: The Path Ahead

Given the continuing effects of the global pandemic, the future remains unclear. Business leaders are facing this reality and must assess the economic impact to their businesses, while planning an optimal way forward and a return to pre-COVID-19 financial expectations.

Despite the fact that nearly all aspects of the global economy have been hard hit, equity prices continue to tread higher. BDO’s Valuation & Business Analytics (VBA) team sought to investigate this disconnect, examining both the narrative and real data. In our inaugural issue of The Path Ahead, Analysis of Analyst Estimates for Insights on the Economic Recovery[1], over 20,000 equity analyst estimates for 428 public companies spread across 24 industries were analysed. Leveraging data algorithms and dashboard analytics, the study synthesized the estimates by industry.

Opinions regarding the duration of the impact to the global economy and the extent of an eventual recovery are somewhat divided. The view of a U-shaped recovery is shared by many, which seems like a rational perspective given the increase in equity prices. However, the combined data shows a steeper and longer degradation in revenues and profits than many would hope. While this article highlights certain industry level data, for more detailed information on each industry please see the study in its entirety.

Analysis of the results by industry reveals stark differences, both in terms of near-term impacts and the timing and extent of recovery. Although decline in expected revenues and profits is to be expected for certain industries, the magnitude of the reductions conveyed by analyst estimates is severe.[2] 

Despite the near universal decline in forecasted fundamentals, equity markets have not necessarily followed the same trend. As seen below, we have calculated the change in aggregate total enterprise value (TEV) for each of the 24 industries from 31 January 2020 to 31 May 2020. Further examination highlights a significant finding. As indicated below, analyst estimates continued to deteriorate from 31 March through 31 May. However, a review of the Market Value Performance over the same period shows that stock prices moved in the opposite direction. The table below displays the percentage decrease in earnings before interest and taxes in 2020 and long-term earnings before interest and taxes from 31 March to 31 May 31, along with the percentage change in aggregate enterprise value over the same period.

The aggregate total enterprise value for every industry increased from 31 March to 31 May. However, none of the 24 analysed industries observed an increase in 2020 estimated earnings before interest and taxes over that same period. Additionally, only four of the 24 industries had upward revisions for long-term earnings before interest and taxes. The remaining 44 data points were revised lower from 31 March to 31 May – many of them significantly.

The path ahead

Despite the apparent disconnect, an analysis of recent trends in May potentially foreshadows a bottom to the precipitous decline in estimates. In March and April, nearly all industries saw reductions in forward estimates. However, beginning in May, there is evidence to suggest that the trend is beginning to slow and, in some cases, even reverse. For example, 11 of the 24 industries saw little change in both near-term and long-term revenue and estimated earnings before interest and taxes from April 30 to May 31. Four industries saw mild recoveries in estimates over that same period.

The magnitude and rate of downward revisions in May offer some hope that COVID-19 considerations have been fully incorporated into forward estimates. In our next quarterly study, we will analyse data through to 31 August 2020 and look to answer whether analyst estimates will catch up with market values, or if the disconnect between fundamentals and market value continues.

References

1. https://www.bdo.com/getattachment/7266e3f4-aa26-4942-a1ff-a0485c561374/attachment.aspx?ADV_CFS_VBA_Forecast-Engine-Industry-Impact-Study_Issue-1_Web.pdf
2. Source for all subsequent graphs: Data analyzed from S&P Global’s Capital IQ database.

To determine the furthest available forecast year, BDO LLP identified the last year in which substantially all of the companies had analyst estimates for the subject metric. Additionally, to ensure the integrity of the trend analyses and negate any impact from a survivorship bias, a company included in the long-term analysis must have not only had analyst estimates for the furthest available forecast year, but also all years in the interim, and for all dates in which the estimates were pulled (e.g., 1/31/2020, 2/29/2020, etc.).