How is Coronavirus Affecting Cars, Casinos and Comfort Food?

No North American plants have stopped production at the time of writing (March 12) due to parts shortages, but we expect earnings headwinds from air freight charges and production will be affected if Chinese parts plants don’t reopen fast enough to keep North American plants moving. We are keeping our forecast in place provided the highest fear levels from the virus subside in the next few months.

We’ve seen resumption of 0% financing from automakers and lower interest rates following the Federal Reserve’s rate cut may mitigate some damage. Large abrupt declines from a health scare is not surprising to us, but we think it’s too early to extrapolate numbers nationally or for the rest of 2020. Still, we expect poor sales numbers in March and April.

US light-vehicle sales for the first two months of the year were doing well, albeit helped by high incentives. According to automotive analyst Wards, US sales through February rose 4.5% year over year, with all but three automakers Ford (F), Nissan (NSANY), and Tesla (TSLA) showing growth. Contrary to what the stock market is doing, we do not think it’s time to panic, but uncertainty will remain for a while. 

Casinos: Short-Term Struggles

Dan Wasiolek

We recently lowered our near-term forecasts for the online travel and hotel operators we cover to account for the global spread of coronavirus. Previously, we had factored some demand declines into travel operators' Asia-Pacific businesses. Now, in 2020 we expect North America to see travel demand decrease 5%, Europe to be down 10%, and the rest of the world to drop 25%.

This view assumes that travel demand weakens through the second calendar quarter of this year before stabilising and recovering in the second half of 2020, followed by a near full recovery in travel in 2021.

Our assumption is formed by recent travel operator earnings updates that discuss travel volume being down 15% year to date through February. It is also supported by ongoing conference cancellations by global corporations, which signal that demand is likely to weaken before getting better.

Additionally, while we acknowledge that Sars might not be a perfect proxy for the new coronavirus, which is more of a global outbreak, we note that the Sars virus affected global system distribution (where many airline tickets are bought) industry volumes with a 10% drop in the first half of 2003, followed by flat levels in the second half of the year, and then a healthy rebound to 5.5% growth in 2004, according to Amadeus.

As a result, we have reduced our Las Vegas Sands (LVS) 2020 revenue projection to a 22% decline from a 6% drop prior. This reduces our Las Vegas Sands fair value estimate to $72 per share from $76. We have reduced our MGM Resorts International (MGM) 2020 revenue projection to an 8% decline from a 2% drop, reducing our fair value estimate to $39 per share from $40. Lastly, we have reduced our Wynn Resorts (WYNN) 2020 revenue projection to a 17% decline from a 4% drop, reducing our Wynn fair value estimate to $150 per share from $160.

Barring an extended and severe global coronavirus outbreak, we see the shares of all three companies offering attractive long-term value. 

Fast-food: Opportunities for the Tech-Savvy

R.J. Hottovy

The restaurant sector is under pressure as several US markets have restricted dine-in service in an effort to curb the spread of Covid-19. Restrictions vary by state and city, but even in markets where takeaway and drive-thru orders are still permitted, we expect severe declines in diners for at least the next two months and an uneven traffic recovery into the back half of 2020. In Europe, there are more severe restrictions in place: in the UK, McDonald's stores are closing this week.

The situation is fluid, but our best guess is that most US quick-service chains will experience at least high-single-digit to low-double-digit declines for the year, while casual-dining chains are looking at declines of 30% or more. While restaurants find themselves with a difficult 2020 ahead, we believe the sector's pullback offers several investment opportunities.

What criteria should investors use to evaluate opportunities during heightened uncertainty? First, value-oriented players tend to outperform during economic shocks; players that can be more aggressive on pricing are better-placed for outperformance as the year progresses.

Second, we believe those players that are further along with their mobile platforms, and particularly personalised marketing efforts, should be better positioned to communicate with consumers during the social distancing and the coronavirus recovery period.

Third, we'd look at companies and franchisee systems with healthy balance sheets. Because of recent refranchising activity, many operators and their franchisees are now overleveraged, making it more difficult to navigate extended periods of restaurant restrictions.

We will be adjusting near-term estimates for our restaurant coverage list but would gravitate to names that best satisfy these three criteria. This includes: wide-moat Domino's (DPZ), which should have limited disruption from dine-in restrictions, wide-moat McDonald's (MCD), a value leader with a healthy balance, and wide-moat Starbucks (SBUX), which has solid licensing partners and has invested in technology.