The third-quarter earnings season that’s currently winding down has seen S&P 500 companies generate overall per-share earnings growth of more than 27% and sales growth of more than 15%, numbers that suggest a robust recovery from 2020’s pandemic lows.
But the high growth rates, coming off what was for many companies a very low base, are masking underlying problems that do not bode well for the future. An analysis of the underlying strength of companies in one economically sensitive sector, that of travel and leisure, highlights the trend.
That sector, which borrowed heavily to survive during the worst of the pandemic, was expected to enjoy a steep increase in demand for flights and hotel rooms in the summer as the vaccine program was kicking off in the spring. But that expectation was dashed by the highly transmissible delta variant of the coronavirus that has pushed cases, hospitalizations and deaths back to levels seen in winter and discouraged people from leaving home.
“The largest travel and leisure public companies are still on a knife’s edge,” said James Gellert, CEO of RapidRatings, a company that assesses the finances of private and public companies.
“For these companies, much of the pain has lasted over a year now, driven largely by empty properties, unsold tickets, continued confusion around lockdowns and quarantine policies, and an optimism that has yet to fully meet reality.”
It’s not just the travel sector that is feeling the pain. Many industries are struggling with inflationary pressures, supply-chain hassles, border closures and quarantine measures, including autos and retail, both of which saw high changes in cash to current liabilities from 2019 to end-2020.
“People need to monitor all industries, and companies within them, carefully to observe whether the “new” liquidity gained over the past 4-5 quarters can sustain companies or just prop them up for a while longer,” said Gellert.
Deep dive
RapidRatings analyzes a company’s financials and assigns it a financial-health rating, or FHR, and core health score, or CHS. The former is a measure of short-term probability of default and the latter evaluates efficiencies in a business over a two- to three-year perspective.
“‘The largest travel and leisure public companies are still on a knife’s edge. For these companies, much of the pain has lasted over a year now, driven largely by empty properties, unsold tickets, continued confusion around lockdowns and quarantine policies, and an optimism that has yet to fully meet reality.’”
…
Read More: The big risk investors may be missing in third-quarter earnings