Barron’s - USA (2020-09-28)

September 28, 2020 BARRON’S 11

PREVIEW

IDENTIFYING A LIVING-DEAD COMPANY

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Monday 9/

Alibaba Group Holding hosts a vir-

tual Investor Day that continues

through Wednesday. Speakers will

include CEO Daniel Zhang.

The Federal Reserve Bank of Dallas

releases its Texas Manufacturing Out-

look survey for September. The con-

sensus estimate is for an 8.3 reading,

roughly even with the August figure.

Tuesday 9/

IHS Markit , McCormick , and Mi-

cron Technology report earnings.

The first of three presidential de-

bates between president Donald

Trump and former vice president Joe

Biden takes place at Case Western

Reserve University in Cleveland.

The Conference Board releases its

Consumer Confidence Index for Sep-

tember. Economists forecast a 90

reading, higher than August’s 84.8.

The postpandemic high for the index

was91.7inJuly.

Wednesday 9/

ADP releases its National Employ-

ment Report for September. The econ-

omy is expected to add 625,000 pri-

vate-sector jobs, up from 428,000 in

August. Since shedding almost 20

million jobs in March and April, 43%

of that total, or 8.5 million jobs, have

been regained, according to ADP.

The Bureau of Economic Analysis

reports its final estimate for second-

quarter gross domestic product. The

economy is forecast to have shrunk at

an annual rate 31.7%, which would be

unchanged from the BEA’s second

estimate released in late August.

The National Association of Real-

tors releases its Pending Home Sales

Index for August. Consensus estimate

is for a 2.3% rise, a deceleration from

July’s 5.9%. Home sales are in the

midst of a V-shape recovery, with

sellers seeing their homes going un-

der contract in record time, according

to Lawrence Yun, the NAR’s chief

economist.

The Institute for Supply Manage-

ment releases its Chicago Purchasing

Managers’ Index for September. Econ-

omists forecast a 52.1 reading, slightly

higher than August’s 51.2.

Thursday 10/

Conagra Brands , Constellation

Brands , and PepsiCo report quar-

terly results.

The BEA reports personal income

and spending for August. Income is

expected to decline 2.8% month over

month, while consumption is seen

rising 0.9%. This compares with gains

of 0.4% and 1.9%, respectively, in July.

Friday 10/

Noble Energy holds a special share-

holder meeting seeking approval for

its proposed merger with Chevron ,

which would acquire all outstanding

shares of Noble. The all-stock trans-

action, with an enterprise value of

$13 billion, was first announced in

late July.

Coming Earnings

Consensus Estimate Year Ago

M

Thor Industries (Q4) $1.36 $1.

T

McCormick & Co. (Q3) 1.52 1.

More Earnings on Page M32.

Consensus Estimate

Day Consensus Est.Last Period

T August Wholesale Inventories -0.15% -0.30%

September Consumer Confidence 90.0 84.

W Q3 GDP -31.7% -31.7%

TH August Personal Income -2.5% 0.40%

August Construction Spending 0.70% 0.10%

September ISM Manufacturing 56.0 56.

F September Nonfarm Payrolls 1,032,000 1,027,

September Unemployment Rate 8.2% 8.4%

August Factory Orders 1.5% 6.4%

September Michigan Sentiment 78.9 78.

Unless otherwise indicated, times are Eastern. a-Advanced;

f-Final; p-Preliminary; r-Revised Source: FactSet

For more information about coming economic reports—and

what they mean — go to Barron’s free Economic Calendar

at http://www.barrons.com

The Bureau of Labor Statistics releases the jobs report for

September. Nonfarm payroll employment is expected to rise

by 932,500, after August’s 1.37 million gain. The headline un-

employment rate is seen edging down to 8.2% from 8.4%.

Friday

Zombies on

The March

With Halloween near, investors need to keep an eye out for

zombies. The pandemic has boosted the number of zombie

companies—unprofitable, cash-poor firms that rely on fi-

nancial markets to cover their costs—reports money man-

ager Principal Global Investors. In the first quarter, Princi-

pal found 18% of companies in the Bloomberg Total Return

Index couldn’t cover interest costs with the previous year’s

pretax earnings, up from a little more than 10% a year ago.

The zombie label first emerged in Japan’s “Lost Decade”

from the early 1990s to early 2000s, when Japanese banks

were pressured to extend loans to firms at low interest

rates to keep them in business. The outbreak has since

spread. A Bank for International Settlements study earlier

this month said that global publicly traded zombie compa-

nies had risen from 4% in the late 1980s to 15% in 2017.

How do you identify a zombie firm? Principal Global

offers a guide: companies that can’t cover interest costs

twice with the previous year’s pretax earnings; whose

spread between return on equity and cost of equity is less

than four percentage points; whose one-year and average

three-year sales growth is less than 3%; and whose Altman

Z-Score—a measure of liquidity, solvency, and profitability

sometimes used to predict bankruptcy—is below 1.8.

The risks aren’t easy to quantify. Only 25% of companies

classified as zombies exited the market between 1980 and

2017, notes the BIS. Some were liquidated, others were ac-

quired. In 2017, says the BIS, a “recovered zombie” faced a

roughly 17% chance it would relapse in the next two-year

period, compared to a 3% chance for firms that have never

been among the living dead. Scary.—Alexandra Scaggs

A Global Outbreak

The share of zombie companies has

been growing for decades.

Sources: Bank for Int’l Settlements; Bloomberg;

Principal Global Asset Allocation

RiseoftheLivingDead

The pandemic made it tougher for

companies to cover their costs

with last year’s earnings.

Share of Listed Companies That

Are Losing Money and Indebted

U.S. Global

’90 ’95 ’00 ’05 ’10 ’

0

5

10

15

20%

Data as of March 31, 2020

’10 ’12 ’14 ’16 ’18 ’

5

10

15

20%

PortionofCompaniesThat

Can’tCoverInterestCosts

Illustration by Elias Stein