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25-11-2020, 05:39 PM
Opinion: Beware of ‘zombie’ companies running rampant in the stock market
* A total of 19%, or 571 companies, in the Russell 3000 Index are considered unviable
By William Barritt
Published: Nov. 24, 2020 at 12:48 p.m. ET
Few would dispute that the Federal Reserve’s enormous doses of monetary medicine this year were necessary to alleviate the worst economic impacts of the coronavirus pandemic.
But every treatment comes with risks and side effects, and the aggressive intervention by the U.S. central bank added significantly to the ranks of the corporate walking dead, as I call it.
These so-called zombie companies continue to muddle along in a financial twilight zone because near-zero interest rates are driving investor appetite for risk while allowing faltering businesses to keep tapping capital markets for the cheap cash they need to make up the shortfall between lackluster earnings and the money needed to pay interest on their debt.
A widely accepted definition of a zombie is a business with an interest coverage ratio of less than 1 for three years. On that measure, 11% of Russell 3000 Index RUA, +1.57% companies are unviable, a figure that jumps to 19%, or 571 companies, on a 12-month basis. Altogether, those 571 businesses employ more than 800,000 people. (The index encompasses 98% of the total stock market.)
No profits
Partly due to companies in pre-product, pre-revenue development phases in sectors such as tech and biotech, about a fifth of Russell 3000 companies have had no or negative earnings per share on average over the past 25 years. Currently, that number is 10 percentage points higher, at 30%. To put that in context, the proportion was 29% in the dot-com bust era at the turn of the century and last exceeded 25% during the Great Financial Crisis (GFC).
Rather than being limited to small, little-known enterprises, zombies include names such as security services player ADT Inc. ADT, +1.74%, ride-share company Uber Technologies Inc. UBER, +2.43%, oil-drilling expert Transocean RIG, +13.33% and movie-theater operator AMC Entertainment Holdings Inc. AMC, +20.21%. While some of these companies are in sectors that have been hit hard by the pandemic, Tesla Inc. TSLA, +6.42%, Wayfair Inc. W, -5.71% and Roku Inc. ROKU, -1.29% are also among the household names whose earnings before interest, tax, depreciation and amortization (EBITDA) don’t cover debt payments.
No profits
Partly due to companies in pre-product, pre-revenue development phases in sectors such as tech and biotech, about a fifth of Russell 3000 companies have had no or negative earnings per share on average over the past 25 years. Currently, that number is 10 percentage points higher, at 30%. To put that in context, the proportion was 29% in the dot-com bust era at the turn of the century and last exceeded 25% during the Great Financial Crisis (GFC).
Rather than being limited to small, little-known enterprises, zombies include names such as security services player ADT Inc. ADT, +1.74%, ride-share company Uber Technologies Inc. UBER, +2.43%, oil-drilling expert Transocean RIG, +13.33% and movie-theater operator AMC Entertainment Holdings Inc. AMC, +20.21%. While some of these companies are in sectors that have been hit hard by the pandemic, Tesla Inc. TSLA, +6.42%, Wayfair Inc. W, -5.71% and Roku Inc. ROKU, -1.29% are also among the household names whose earnings before interest, tax, depreciation and amortization (EBITDA) don’t cover debt payments.
Low returns on bonds
With yields on asset classes including Treasuries, investment-grade and high-yield debt at near record lows, investors’ willingness to take additional risk is extending to lower-quality companies, allowing them to continue to raise debt financing. U.S. corporate bond issuance almost doubled to $1.45 trillion in the first nine months of 2020 from the same period a year earlier, with high-yield accounting for a record $346 billion through the first week of October.
That helped to compress the interest coverage ratio for the Russell 3000 as a whole to 4.6 times at the end of the third quarter, from a peak of 7.17 times in early 2015 and bringing the data point close to the 4.53 level seen during the GFC, suggesting well-run companies are also feeling duress from the pandemic.
More details in https://www.marketwatch.com/story/beware...=home-page
* A total of 19%, or 571 companies, in the Russell 3000 Index are considered unviable
By William Barritt
Published: Nov. 24, 2020 at 12:48 p.m. ET
Few would dispute that the Federal Reserve’s enormous doses of monetary medicine this year were necessary to alleviate the worst economic impacts of the coronavirus pandemic.
But every treatment comes with risks and side effects, and the aggressive intervention by the U.S. central bank added significantly to the ranks of the corporate walking dead, as I call it.
These so-called zombie companies continue to muddle along in a financial twilight zone because near-zero interest rates are driving investor appetite for risk while allowing faltering businesses to keep tapping capital markets for the cheap cash they need to make up the shortfall between lackluster earnings and the money needed to pay interest on their debt.
A widely accepted definition of a zombie is a business with an interest coverage ratio of less than 1 for three years. On that measure, 11% of Russell 3000 Index RUA, +1.57% companies are unviable, a figure that jumps to 19%, or 571 companies, on a 12-month basis. Altogether, those 571 businesses employ more than 800,000 people. (The index encompasses 98% of the total stock market.)
No profits
Partly due to companies in pre-product, pre-revenue development phases in sectors such as tech and biotech, about a fifth of Russell 3000 companies have had no or negative earnings per share on average over the past 25 years. Currently, that number is 10 percentage points higher, at 30%. To put that in context, the proportion was 29% in the dot-com bust era at the turn of the century and last exceeded 25% during the Great Financial Crisis (GFC).
Rather than being limited to small, little-known enterprises, zombies include names such as security services player ADT Inc. ADT, +1.74%, ride-share company Uber Technologies Inc. UBER, +2.43%, oil-drilling expert Transocean RIG, +13.33% and movie-theater operator AMC Entertainment Holdings Inc. AMC, +20.21%. While some of these companies are in sectors that have been hit hard by the pandemic, Tesla Inc. TSLA, +6.42%, Wayfair Inc. W, -5.71% and Roku Inc. ROKU, -1.29% are also among the household names whose earnings before interest, tax, depreciation and amortization (EBITDA) don’t cover debt payments.
No profits
Partly due to companies in pre-product, pre-revenue development phases in sectors such as tech and biotech, about a fifth of Russell 3000 companies have had no or negative earnings per share on average over the past 25 years. Currently, that number is 10 percentage points higher, at 30%. To put that in context, the proportion was 29% in the dot-com bust era at the turn of the century and last exceeded 25% during the Great Financial Crisis (GFC).
Rather than being limited to small, little-known enterprises, zombies include names such as security services player ADT Inc. ADT, +1.74%, ride-share company Uber Technologies Inc. UBER, +2.43%, oil-drilling expert Transocean RIG, +13.33% and movie-theater operator AMC Entertainment Holdings Inc. AMC, +20.21%. While some of these companies are in sectors that have been hit hard by the pandemic, Tesla Inc. TSLA, +6.42%, Wayfair Inc. W, -5.71% and Roku Inc. ROKU, -1.29% are also among the household names whose earnings before interest, tax, depreciation and amortization (EBITDA) don’t cover debt payments.
Low returns on bonds
With yields on asset classes including Treasuries, investment-grade and high-yield debt at near record lows, investors’ willingness to take additional risk is extending to lower-quality companies, allowing them to continue to raise debt financing. U.S. corporate bond issuance almost doubled to $1.45 trillion in the first nine months of 2020 from the same period a year earlier, with high-yield accounting for a record $346 billion through the first week of October.
That helped to compress the interest coverage ratio for the Russell 3000 as a whole to 4.6 times at the end of the third quarter, from a peak of 7.17 times in early 2015 and bringing the data point close to the 4.53 level seen during the GFC, suggesting well-run companies are also feeling duress from the pandemic.
More details in https://www.marketwatch.com/story/beware...=home-page
Specuvestor: Asset - Business - Structure.
