Takeaways From Earnings Calls Last Week: High Pent-Up Demand

Summary

• Growth is picking up in affected industries as the pent-up demand is slowly being released.
• Airline stocks may be soaring but there is need to be cautious given the uncertain visibility in the sector.
• There are still opportunities in the cloud which is expected to grow to a $1T market in a decade.

In earnings class last week, we learnt that there are some glimmers of hope across such industries like airlines, travel and retail as demand picks up from the April lows with significant pent-up demand being unleashed. The key pick was that despite there being many positive signs, we should still cautious in our investing.

Chart of the Week: Lowest quarterly earnings for the S&P 500 since Q1 2009

Growth is picking up in some industries

There is a recovery going on from the April lows. Things are picking up. Hard hit industries are seeing an increase in revenues and people are making bookings for holidays in the H2 2020. Cancellations have slowed down at Expedia. Here are others seeing recovery:

"I am pleased to say, but I would not get overly excited about it, that we have seen nice growth coming into May" - Expedia (EXPE) CEO Peter Kern

"We look daily at departures by region by platform, and we have seen some sequential improvements over the last three or four weeks." - General Electric (GE) CEO Larry Culp

"reservations for short-haul travel bookings have almost fully recovered compared to last year as more and more regions lift travel restrictions. Long-haul business and leisure travel demands are gradually increasing as well" - Trip.com (TCOM) Co-Founder James Liang

"Through the first four weeks of Q2, our comparable store sales are approximately in-line with the prior year" - Advance Auto Parts (AAP) CEO Tom Greco

"...in the states that are beginning to reopen, we are seeing our stores outperform the total company comp in those locations, which to us is a data point but it's a glimmer of hope" - Lowe's Companies (LOW) CEO, Marvin Ellison

"...we have seen a slight uptick in the sales-to-refunds ratio over what we were expecting in April. But again, that's including some days that have even been positive." - Delta (DAL) CFO Paul A. Jacobson

"Traffic was down initially around 80% and now it has come back to about 60%..once stores are open for a few days, we have sort of seen them reverting to that down 50%-ish type range." - Urban Outfitters (URBN) Richard A. Hayne

"While bookings still remain suppressed, they are better now than they were in mid-April, driven by improved trends for the fourth quarter of 2020 and 2021 sales" - Royal Caribbean Cruises (RCL) Jason Liberty

Despite the uptick, management teams are urging caution. Delta CEO stated: "I caution that we don't jump to any conclusions." Times are tough for most companies and investors are ignoring these as companies that have declared bankruptcy like JC Penney and Hertz skyrocket. Listening to management teams speak, one gets the feeling that there is a mania in the markers which are not presently paying attention to fundamentals. JETS, the ETF that tracks airlines, had its highest daily inflow last week on Friday with $122m in inflows. The ETF is now up a staggering 43% since Buffett sold his holding of airlines.

Source: @ericbalchunas

"...there is nothing but uncertainty in the near future right now and every single day truly feels like a new beginning." - Urban Outfitters (URBN) Richard A. Hayne

"It's going to be a while before people start crossing borders, getting into planes or travelling for business" - Airbnb CEO Brian Chesky

What can we learn from air travel post 9/11 to inform us how air travel might look going forward? That travel will change and may not revert to what it was:

"It is demonstrably untrue that people stopped traveling as a result of 9/11. In fact, after a period of adjustment, travel took off. Sorry for the pun. On the other hand, it equally isn't true that after the period of adjustment, travel reverted to the status quo ante. In fact, travel became very different from pre-9/11. What happened was that we adjusted, and all travel that took place in a post-9/11 world was really quite different from travel previously...Travel didn't simply revert to what it had been, rather travel adjusted to the new normal, and it grew on that basis. I believe personally that the same thing is going to happen in a post-COVID-19 world. Travel and tourism will grow, but not by reverting to what it was, but by adjusting to a world where all activities, everything we do in the world will have changed" - Royal Caribbean Cruises (RCL) CEO Richard Fain

High demand for home improvement and DIY projects

The result of people being at home has been a high demand for home improvement. People are noticing that there are things that need fixing and are spending to fix it. The expectation would be that these kinds of companies engaged in home improvement will have an excellent one or two quarters ahead. Activities that saw an uptick ranged from outdoor landscaping, indoor repair and maintenance work to long-deferred home projects to fixing car parts. Look at the stats from 3 different companies who have seen a surge in these areas.

"During the last 3 weeks of April and continuing into the first 2 weeks of the second quarter, we have seen a significant acceleration to double-digit comp sales growth, with strong performance across most of the store, as customers turn to repairs and home improvement projects" - The Home Depot (HD) CEO Craig Menear

"Our DIY omnichannel business is growing double-digits, significantly outperforming professional. While there are a number of factors here, from an industry perspective, the DIY business tends to perform well during an economic downturn, as unemployment increases, new car sales declined, the car park ages and more customers do their own maintenance and repairs...So a couple of important industry factors there people at home, more time on their hands, doing do-it-yourself projects. So those are some things for the industry at large." - Advance Auto Parts (AAP) CEO Tom Greco

"The uptick in DIY demand was partly driven by the arrival of spring weather in many western and southern geographies, as well as a customer mindset that was heavily concentrated on the home." - Lowe's Companies (LOW) CEO Marvin Ellison

Cloud is just getting started

Cloud has been growing rapidly in the past few years. The cloud services market was forecast to grow at 17% in 2020. That forecast will definitely be surpassed this year given the tailwind of working from home. There has been increased demand for cloud storage as leading cloud providers like Amazon, Microsoft and Salesforce see a surge in revenues.

Microsoft Q3 Report and SalesForce Q1 report

One is tempted to ask whether the market has any more room for growth going forward. We got some perspective from NVIDIA CEO who sees it growing from a $1 Trillion market in the next ten years. There seems to be a lot of room for growth in this market that investors would be wont to pay attention to.

"Cloud computing is the single largest IT industry transformation that we have ever seen... I think that accelerated cloud computing is a movement that is going to be a multiyear if not a decade-long transition." - NVIDIA (NVDA) CEO Jensen Huang

"At the edge, the market for capabilities like remote cloud connectivity, and virtual desktop solutions was stronger than pre-crisis in certain segments." - Hewlett Packard Enterprise (HPE) CEO Antonio Neri

Conclusion

Activity is picking up in certain industries but we should be cautious still. We also note that there are opportunities in home improvement and cloud companies we can pay attention to.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.