Robert Stephens, CFA, discusses the prospects for FTSE 100 companies that are currently being affected by the Covid-19 pandemic.
Buying shares in a company that has temporarily closed some, or even all, of its operations may seem to be highly illogical to many investors. A closed business is unable to generate sales, which could lead to significant pressure on its financial outlook.
The Covid-19 pandemic has caused various FTSE 100 companies to temporarily shut down their operations. Share price falls have generally followed, which could make now a good time to consider buying them for the long run, in my opinion.
Visitors to Next’s (LON:NXT) website have been met with a closure message since 26 March, when the FTSE 100 retailer ceased all trading. Its products are non-essential items – in the short term at least. Safety worries among its staff also prompted it to shut down operations until further notice.
Next’s most recent full-year results included a Covid-19 stress test. It determined that the company can withstand a reduction in annual sales of £1 billion (25%) without exceeding its current bond and bank facilities. The firm also announced recently that it is eligible for the government’s Covid Corporate Financing Facility (CCFF), which could help to ease its short-term financial requirements.
Longer term, Next has an enviable market position. It has embraced the choice that online retailing offers to consumers through allowing its competitors to sell their products through its online platform. This is likely to position it for growth in a retail industry that could shift towards online sales at an even faster pace following the Covid-19 pandemic.
The prospect of easyJet’s (LON:EZJ) fleet of aircraft returning to our skies seems to be a very distant one at the moment. The company has accessed the CCFF, and has drawn down on credit lines. It now has access to cash reserves of £2.3 billion, while benefiting from government policies such as the Job Retention Scheme.
More government support may be needed for the sector should aircraft be grounded for a prolonged period. However, the idea that airlines will simply be allowed to fold en masse seems unlikely in an era where air travel is becoming more popular. easyJet’s relatively large cash position suggests it is one of the airlines that could even increase its market share as a result of Covid-19.
Beyond the current crisis, easyJet’s use of new technology to improve its pricing efficiency and plans to develop its travel business could catalyse its financial performance. For long-term investors, more volatility could be the cost for attractive capital gains.
Sales sites across the housebuilding industry are closed, with construction also postponed by Covid-19 containment measures. Housebuilder Persimmon (LON:PSN) could survive a period of prolonged disruption, since it has a cash position of £610 million.
Improvements to the company’s customer satisfaction ratings have been swift under a new strategy that seeks to prioritise quality over quantity. It still has some way to go to reach industry-leading customer satisfaction ratings, but has been moving briskly in the right direction.
Government policies such as SDLT relief and Help to Buy are unlikely to be scaled back over the medium term, as the country seeks to get back to normal following Covid-19. This could support Persimmon’s recovery, while a fundamental shortage of new homes versus demand and low interest rates may mean that it enjoys improving operating conditions in the long run.