00:01 05:38
Welcome to Morningstar. I'm Holly Black. With me is Denise Molina. She is an equity analyst
at Morningstar. Hello. Hi.
So, a common phrase we hear in investing is that we should be greedy when everyone else
is fearful. And I think people are quite fearful at the moment with stock markets falling,
but you're seeing opportunities in the supply chain side of things. Can you tell us a bit
more about that? Yeah. During troubled times in the economy,
when we have recessions, companies as like other people in the economy tend to hoard
cash. So, the first thing that happens with supply chain and with capital goods companies
is they see a drop in demand for orders that are called short cycles. So, there's a large
part of cap goods that is ordered and delivered within a quarter. And if you're a company
that's uncertain about your cash flow outlook, you're going to cut CapEx and within the CapEx
budget, it's going to be all those capital goods products.
So, what we're anticipating is a pretty steep drop in earnings for capital goods companies
coming up in the second quarter because this particular go around is not just like a recessionary
environment, it is literally the spigot being turned off. So, plants are being shut down,
because of social distancing. So, that means that the supply is severely disrupted and
orders are not getting through and they're not being produced. So, what we're going to
see is something pretty dramatic in the second quarter. And it could be to some share prices
declining to levels that we think could become more attractive than they are right now. So,
with the caveat that we've got earnings volatility ahead of us and potential further declines
in share prices, we see some really nice companies that haven't been cheap for a while, potentially
coming on sale that we'd be looking at and watching for good opportunities to get into.
So, when you talk about capital goods, what sorts of companies are you looking at? Where
are we seeing those opportunities? Well, right now, we've seen some of the companies
that are exposed to automotive end markets and to the oil price end markets. And so,
one of the things that we look at it is, diversified like ABB and Schneider, these companies supply
into refineries, into utilities, into general manufacturing and those orders are going to
be cut severely, as we all know that refiners, the integrated oil companies have already
announced CapEx budget declines. So, we know that 2019 is going to be pretty horrific in
terms of earnings. But those companies will see those orders come back. And if you look
at the Great Recession, if you look at the pattern of capital goods spend, the drop-off
in 2009 was pretty dramatic. But then that same volume of demand came back within two
years' time. So, capital goods are things you can hold back on in the short term but
not in the long term because equipment ages that basically runs your plants or refineries.
So, you need to spend on it eventually. You can only hold off so long.
So, ABB we like because it not only has a really strong portfolio of moaty products,
but it also has the number two robotics company in the world. So, they are the number two
supplier of robotics. Robotics has a long, long runway of growth. It's really only used
heavily in automotive. So, we like that long-term in terms of the automation trends and adoption
rates for robotics to offer promise long term. It also has exposure along with Schneider
to ESG theme. So, if you think about building automation and building automation, you can
think about like how to control energy costs, make sure that the lights off when nobody
is in the building, make sure that you're not powering up equipment that's not being
used. So, that kind of spend is something that we see as also a long-term trend. And
ABB and Schneider both supply a lot of software and components that help companies become
more ESG-compliant. So, you said you're expecting a bit of a horrific
2020 before a bounce back? How do investors handle this? Do they buy in now? Or do they
wait, or should they already be invested and just waiting for the recovery?
Well, we're certainly not market timers. And we don't think we can be precise about where
the bottom is. But we do think that there's potentially more volatility to come that the
sector hasn't sold off as much as it did during the Global Financial Crisis. And it certainly
was expensive before we went into this situation. So, we've seen some pretty decent drops in
some of the companies and we think that there could be further declines as the second quarter
comes out. As you said, there's going to be probably some pretty dramatic earnings declines
from these shutdowns and that's maybe not fully appreciated yet by the market, especially
when the US starts to put out their numbers. Denise, thank you so much for your time. For
Morningstar, I'm Holly Black.