So Tuesday saw an increase in the markets driven by fairly massive U.S. FED stimulus / liquidity announcements and promises to help out both businesses and individuals.
S&P 500 was up 6.0% and Toronto (hampered by lower oil prices) was up 2.6%.
Most stocks were up. Some were down – Toll Brothers was down 17.9%.
Boston Pizza units were down 7.4% to $7.34. I sold much of my units in this today because its world has completely changed. The BP restaurants I believe are already starting to shutdown at least for table service in some parts of the country. If the Royalty entity is soon getting vastly reduced royalties then the distribution has to be cut or even suspended for a while. Luckily it has little expenses but it also has some debt and not much cash in reserve. The market seems likely to react very negatively to a cut here. Unless they get a quick government loan (which could happen) this entity is in deep trouble. It would seem irresponsible of the trustees not to cut the distribution. If that proved very temporary and then if people got back to eating out in restaurants then perhaps the distribution could be restored quickly. I am having trouble imagining that quick scenario will happen.
Canadian Tire was down 9.2% – Non-essential retailers are being shut down. Canadian Tire has a lot of financial strength but a shutdown will be very harmful. In their case too the dealers have stock in store and even if they are open are unlikely ordering more stock from Canadian Tire Corporation. And then there is the risk of credit card defaults.
Couche-Tard was almost unchanged for the day. After the close it released earnings which were a little weaker than last year but still good earnings. The gasoline margins were very high a year ago and declined a little this quarter but I think were still better than average. At a quick look and search the press release does not seem to mention the virus. But the impact of the virus will likely be the total focus of their conference call. If consumers are in something close to a lock down then their sales will no doubt plummet.
I hope I am wrong, but I do not see any reason to think the market declines are over. By tomorrow the U.S. stimulus news will be sort of old news and presumably the fear levels presumably rising due to the shut downs. And the outlook for corporate revenues and earnings must be falling rapidly as the extent of the shut downs loom. We need major good news on the medical front to quell the fear.
Someone asked me about the valuation of the S&P 500.
I would say the earnings outlook for the S&P 500 for 2020 is completely unknowable. With wide-spread shut downs, that might me that the S&P 500 earnings for the year come in very low or even negative depending how long the social lock down that seems to be underway lasts.
We can look at the analyst forecasts for S&P 500 earnings for 2020 and 2021 but there is no way the forecasts can have been updated for the latest situation.
For 2020 the latest forecast is GAAP earnings of $155 and operating earnings of $170
For 2021 the latest forecast shows GAAP $171 and operating earnings of $191.
The 2019 actual GAAP earnings were $140 and operating earnings were $157.
With the S&P 500 currently at 2529, we have a trailing GAAP-based P/E of 18 and a P/E of 16 on an operating basis. Not excessive as long as growth was expected to continue. And as the figures above indicate, analysts were expecting strong growth in 2020 and then again 2021.
But now we have a new reality. This virus seems certain to wallop earnings in 2020 and it would likely take time to recover.
As one scenario. let’s say S&P 500 earnings go back to their early 2017 level of about $100. Apply a 15 P/E and a fair value of the S&P 500 is 1500 or about 40% below today’s level. Apply a 20 P/E and you get 2000 or 21% below current levels.
In the end, it is almost impossible to know the fair value of the S&P 500 since it is so hard to know what the economy will look like when this is hopefully all over in say 2021.