It is without doubt, every company has been affected by the coronavirus and the economic crises it has brought. A huge amount of production and consumption has stopped. Revenues at businesses have plummeted and many have taken on debt just to survive. But not all companies have been negatively affected. Some have in fact gained new business and rising market shares as a result of the new normal.
To understand how a business is faring, we need to understand how demand for its products are affected.
In short, there are 5 different categories for the current demand outlook :1) Net New Demand Created; 2) Demand Brought Forward; 3) Pent Up Demand Created; 4) Loss Of Demand; 5) Demand Not Impacted.
1. Net New Demand Created: It is basically where customers have been drawn to the company’s offering mainly as a result of the current situation. Companies such as Zoom, Microsoft, Spotify, Netflix and Reckitt Benckiser fit this bill. Amazon can also be classes in this category because the longer lockdown stay in place, the longer it will take stores with a high street footprint to open up and Amazon will simply grab market share during this time.
2. Demand Brought Forward: This is mainly as a result of customers stocking up on a company’s product. So whilst sales of these companies will be boosted initially, they will dip as consumers use up the products they have stocked up on. Many consumer staples and food retailers fall into this category. Examples include Tesco, Unilever, Procter & Gamble.
3. Pent Up Demand Created: This is where demand for a product will rise precipitously once lockdowns are eased and life goes back to normal. In a way it is the opposite of Demand Brought Forward, once can call it Demand pushed back. Elective surgeries, entertainment, travel, real estate can be classed in this category. Potential winners could be Intuitive Surgical, Smith & Nephew, Disney, Dart Group.
4. Loss Of Demand: This is where demand is lost whilst a certain shop is closed. Just because you haven’t had a Starbucks for the past 2 months doesn’t mean you will make up for it by buying 2-3 coffees a day when they reopen. Restaurants or on premise consumption feel like they fall in this category: Yum Brands, Hotel Chocolat, Coca Cola,
5. Demand Not Impacted: This is a rarity in the current situation where it is basically business as normal. But some companies do fall in this category. These include many companies in the enterprise software space. Examples include Blackline Inc and Intuit Inc.
As can be seen, different companies are experiencing different levels of demand as a result of the current pandemic. It is no secret that many businesses will fail due to the current economic situation. As investors it our job to make assessments of which businesses will not only survive but strive going forwards. We shouldn’t be sucked into paying sky high prices for stocks that have seen demand brought forward nor should we be sucked into assuming a business has pent up demand when in fact it has experienced a loss of demand. Management will say anything to make you buy into a certain job. As an investor, we need to cut through this noise and assess for ourselves which companies are worth investing in and which should be laid by the wayside.