I recognise that this is being released, at least in Europe, closer to afternoon tea than morning coffee. But bear with me please!
As of the time I am releasing this post, there have now been over 6,000 reported cases and 132 deaths from the Coronavirus in China (CNN). and these figures seems to be growing rapidly. It is no use speculating on how bad this might become, or hopefully how quickly it might be contained. The market overall had a very negative reaction on Monday after the news got worse on the Coronavirus over the weekend, but it gained some of the losses back yesterday and is opening strongly this morning, clawing back even more of Monday’s losses today. It’s feels like investors have formulated their own “bid-ask” on the outcome of this potential catastrophe, and in spite of the virus spreading and claiming more victims, investor concerns seem to be lessening. Investors are correctly being selective in terms of digging deep into the local - for now China-based - operations of international companies. Naturally, these are questions coming from the analyst community on the quarterly earnings calls, regarding the effect of Coronavirus on 2020 outlooks. This topic was addressed in both the quarterly press releases and the earnings calls with Apple and Starbucks yesterday, and I am sure McDonald’s will have something to say about this topic this morning on their earnings call, occurring now. Airlines (BA stopping flights to China for two days, others likely to reduce / stop), casinos especially those with significant operations in Macau, automotive companies manufacturing and / or selling automobiles in China, luxury good companies (like LVMH, released yesterday), and perhaps many others could be affected, too, depending on how long it takes to contain this virus.
Here’s a quick look at three companies that have released earnings with business in China, and how they have addressed the rapid spread of Coronavirus on their 2020 outlook.
SBUX: ($0.79/share vs $0.76/share consensus) has said that its 2020 forecast will be affected by store closures in China because of the Coronavirus, but the company is not sure how severe this might be. For reference, company guidance for FY2020 is currently for revenues to increase by between 6% and 8% and global same-store sales growth to be in the range of 3% to 4%. Based on the last 10-K (Sept 2019), 26% of the company’s owned stores were in China (and owned stores generated 89% of 2019 total revenues, with licensed stores generating the rest). Here’s the excerpt from the company’s earnings press release regarding its 2020 guidance: “Currently, we have closed more than half of our stores in China and continue to monitor and modify the operating hours of all of our stores in the market in response to the outbreak of the coronavirus. This is expected to be temporary. Given the dynamic nature of these circumstances, the duration of business disruption, reduced customer traffic and related financial impact cannot be reasonably estimated at this time but are expected to materially affect our International segment and consolidated results for the second quarter and full year of fiscal 2020. The company will update its guidance for fiscal 2020 when we can reasonably estimate the impact of the coronavirus.” Further information regarding 1Q2020: comparable store sales were up 5% for quarter - +6% in the U.S. and +3% in China. Operating margins improved to 21.9% (vs 21.0%). See company press release here. Shares were down $1.82/share (-2.1%) at the open this morning, as there is obviously concern about the effect of the Coronavirus on Starbucks’ business in China.
AAPL: ($4.99share vs $4.54/share consensus) is exposed in China both because it has supply chain and customer effects. According to CEO Tim Cook on the quarterly earnings conference call yesterday, the effects of the Coronavirus have caused one directly-owned store to be closed, hours to be reduced at other Apple stores, several channel partners to close, and employee travel to be restricted. Apple also manufactures all of its iPhones in China, but the company does not believe that any of its production will be affected. (See commentary regarding supplier Foxconnhere.) Apple widened its 2Q2020 revenue guidance (quarter ended March 31, 2020) to reflect the unknown of the Coronavirus, providing a rather wide range of $63 bln to $67 bln (vs $58 bln 2Q2019 for perspective) . As an aside, AAPL ended the calendar year with $207.1 bln of cash and marketable securities, and $103.3 bln of debt (Aa1/AA+). See company press release here. Shares are up $7.56/share (+2.38%) at the open this morning.
MCD: ($1.97/share vs consensus $1.96/share) had excellent same-store sales growth for the year of +5.9%, decent increase in revenues vs prior year’s 4Q (+4%) but flat revenues for the full year. According to MarketWatch, “China accounts for only 2% of McDonald’s earnings and the company has only closed about 1% of its China stores so far, so expect executives to play down any effects when they report before the bell Wednesday.” I couldn’t find anything in the press release regarding revisions to 2020 guidance based on Coronavirus, but perhaps it will be discussed on the company’s 4Q2019 earnings call which is occurring now (9h30 EST start). MCD shares are up $1.96 (+0.93%) at the open this morning.
Here is what happened to the S&P 500 and these three names in the last five days:
These are just three examples where investors will need to determine their own revisions to 2020 outlook as we continue to stare into the eyes of a great unknown at the moment, at least for those companies doing business in China. More broadly, investors seem to have largely shrugged off their concerns of the Coronavirus for now, “buying the dip” (from Monday) again this morning. And there are loads of earnings coming today, including Boeing (released), GE (released), Mastercard (released), Facebook, Microsoft, Tesla and a slew of others coming later today. Hang on!