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Why stock markets are strong while companies are weak, how best to keep investors informed and why Q1 doesn't matter so much - The just-drinks analyst

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None of us - not even just-drinks' in-house analyst, Ian Shackleton - has seen anything like this. The coronavirus pandemic has thrown us all into panic. As the need for calm heads grows, allow Ian to talk you down.

Market optimism versus company pessimism

If you spend your time reviewing company announcements, as I do, the last few weeks have been pretty depressing. As a consequence of COVID-19, many companies are dropping financial guidance as they have little visibility on trading; cost-cutting and cash containment measures are being announced, additional funding from either debt or equity is being sought and dividends to shareholders are being cancelled. In some sectors, like retail or leisure, where business has effectively come to a standstill, some companies are teetering on the edge of administration.

Now, in beverages, we are talking about a relatively resilient sector where most operations are continuing - if you're a bar or restaurant operator, though, you wouldn't totally agree. On-premise sales have hit the buffers, but it is not surprising that, overall, the newsflow from drinks companies has been better than the average.

Even still, we have seen Diageo, Anheuser-Busch Inbev, Heineken, Carlsberg and The Coca-Cola Co all withdrawing financial guidance, whilst clamping down on costs and cash. Dividends still look relatively secure - Diageo went ahead and paid its interim dividend - but A-B InBev has halved its planned final payout. Indeed, with several family-controlled companies in the industry, I expect we are less likely to see dividend cuts than elsewhere as family members often live off their dividends.

Whilst I would be slightly surprised if many beverage companies feel the need to access equity, there have been several examples of companies drawing down additional debt.

By contrast, the mood in financial markets, particularly in equities, has improved markedly since I wrote last month. The US has been leading the way, with the S&P 500 up over 20% in the last month, the FTSE100 also up, by 15%, and many beverages companies have more than matched this.

I have been asked quite often in the last month why markets are so strong. There's a simple answer - there are more buyers than sellers.

Investors are always trying to guess where companies are going to be tomorrow, rather than where they are today. There is an expectation that the world will start to normalise in the next month or so, and we will go back, to a large extent, to the world as we knew it.

There is a famous saying from Sir John Templeton, who made a fortune buying shares in the US in the Great Depression of the 1930s and founded Templeton Funds, which explains this: "Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria." Let us hope that the investors have got it right and this is the time to buying rather than selling.

Scoring brownie points by helping analysts and investors

In the current climate, I have some sympathy when companies such as Diageo drop their financial guidance. They are facing multiple pressures on supply and demand across a myriad of different channels in different markets. On the other hand, it's not too helpful for analysts and investors when a company just says: "We don't know."

One of the UK regulators, the Financial Reporting Council, realised this quite early and put out advice that companies should endeavour to produce sensitivity analysis for the impact on the business from several scenarios. Some companies reacted very quickly here. Britvic, which is weathering the impact on its out-of-home business, gave an estimate of the monthly profit impact from the lost sales. Pernod Ricard, meanwhile, has had two attempts at this: Firstly, when it tried to quantify the initial impact from what appeared to be a China problem, and then with a more recent announcement that set out various assumptions for the on- and off-premise channels for the rest of the financial year.

Outside beverages, the UK food retailer Tesco was very helpful in its most-recent results, setting out some detailed scenarios for both its sales and costs, depending on how long the lockdown continues.

Others are being slower in coming to the party. I can understand some of the reasons why. If you drop guidance, the likelihood is that the range of analysts' forecasts will become much more varied. This leaves the company with a wide consensus range and removes the need to keep updating financial markets if trading either gets a bit better or worse than expected.

That's fine for now, but analysts and investors will remember those companies that tried to help them, whilst also remembering those that did not.

And so, to first-quarter reporting

For many companies, calendar Q1 is a relatively quiet trading period, particularly in the Northern Hemisphere. Traditionally, this is the least important reporting period. Remember also that many companies have December year-ends and that makes the Q4 reporting period by far the most impactful on analysts and investors - the first quarter often follows very quickly.

This year, Q1 reporting is likely to be rather meaningless, as the business outlook changed dramatically for many companies towards the end of March. My advice for companies would be not to spend too much time on the trends in January and February. Instead, flag what has changed since then, and try to give as much help to the financial community as possible in mapping out the likely scenarios for the future across major markets.

This week we will have reporting from many large drinks - and consumer - companies: Danone, The Coca-Cola Co, Heineken, Unilever, Pernod Ricard and Nestle are all due to deliver their numbers in the coming days. I expect sales through supermarkets will be stronger since the lockdown kicked in, with the on-the-go and on-premise sales dramatically reduced. The last few weeks of the three-month period are likely to have seen a one-off benefit from 'pantry-loading', as the Americans say.

It's not going to be easy, but companies should try their best to give a view on underlying business across their different categories, and different markets, as well as some crystal-ball gazing about the future.

Let's hope I'm not disappointed.


Expert Analysis

Key Trends in Alcoholic Beverages: Powerful changes shaping the wine, beer, spirits and alcohol-free beverages industry

Key Trends in Alcoholic Beverages: Powerful changes shaping the wine, beer, spirits and alcohol-free beverages industry

Key Trends in Alcoholic Beverages: Powerful changes shaping the wine, beer, spirits and alcohol-free beverages industry...

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