Ciara Linnane and Tomi Kilgore
The following article was first published on Sep. 30.
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 after the vaccine program kicked 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 automotive and retail, both of which saw big changes in cash to current liabilities from 2019 to the end of 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.
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.
Both produce a number on a scale of 1 to 100, which is grouped in categories based on risk, as a means to help a potential business partner, vendor or counterparty determine how a company will perform over time. Only financial data is analyzed, and not share price or other market data that would include investor sentiment.
As the chart below illustrates, a sample of companies in the travel and leisure sector had mostly strong FHRs at the end of 2019, before the advent of the pandemic. Southwest Airlines Co. /zigman2/quotes/201071949/composite LUV -2.46% led the pack with an FHR of 91, but that has fallen sharply to 48 at the end of the second quarter, placing it in RapidRatings’ “medium-risk” category.
Similarly, Delta Air Lines Inc.’s /zigman2/quotes/200327741/composite DAL -0.38% FHR has tumbled from 87 at the end of 2019 to 25 at the end of the second quarter, putting it firmly in the “high-risk “category. Online travel site Booking Holdings Inc. /zigman2/quotes/203576210/composite BKNG -2.50% FHR has fallen to 53 from 86. Las Vegas Sands Corp. /zigman2/quotes/208792014/composite LVS -0.88% has fallen to 24 at the end of the second quarter from 86 at the end of 2019.
Core health scores have fared no better. Southwest’s has fallen to 18 from 84, putting in the “very poor” category; Delta’s from 86 to 23, the “poor” category; Booking’s from 81 to 31; and Las Vegas Sands to 20 from 83, all low scores that imply high risk over the medium to long term. Only Marriott International Inc. /zigman2/quotes/200170042/composite MAR -0.80% has been spared a poor core health score, falling to 53 from 78 at the end of 2019, to remain in RadidRatings’ “medium” category.
“While the holiday season might give many of these companies a revenue boost, the hangover will be even more unpleasant come next year if the raw fundamentals don’t show signs of improvement beyond the next quarter,” said Gellert.