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Corona Capital

5 Nov 2020 By Breakingviews columnists

Corona Capital is a column updated throughout the day by Breakingviews columnists around the world with short, sharp pandemic-related insights.


– General Motors

– Quarterly earnings

Clutch move. General Motors swerved around Covid-19 potholes in third-quarter results released on Thursday. The $50 billion automaker’s adjusted earnings per share of $2.83 were over twice analysts’ estimate, according to Refinitiv. U.S. consumers – possibly buoyed by stimulus or less spending on services – scooped up trucks and SUVs. Belt-tightening, like salary reductions, also helped the North American business post adjusted operating profit margins of 15% — over four percentage points higher than in the same period last year.

And Covid-19 may have actually helped the financing unit. Its adjusted pre-tax earnings of $1.2 billion roughly equaled the total for the entire second half of 2019 – driven by higher used vehicle prices. Demand was likely boosted by consumers worried about public transportation. And constrained supply issues may have also pushed more toward this market. But if government stimulus fails to pump up consumer wallets and repossessions increase, some of these positive trends could go into reverse. (By Anna Szymanski)

Covid relief. America’s biggest companies are toughing out the pandemic. Over 80% of the S&P 500 Index members have now published third-quarter earnings, according to Refinitiv. As the period began, analysts expected them to report, on average, 25% less profit than a year earlier. As things turned out, the year-on-year earnings decline is looking like a mere 8%.

Part of the explanation is an economic rebound. In the second quarter, U.S. GDP slumped 9% from a first-quarter level already dented by early lockdown damage. Last quarter, it rebounded more than 7%, according to an initial estimate from the Bureau of Economic Analysis, leaving output down 3.5% from the final three months of 2019.

Full-year earnings are currently forecast to be 16% below last year’s level, with only technology and healthcare companies bucking the trend with meaningful growth. Analysts foresee 2021 more than compensating. But whether the coronavirus, the economy and whoever occupies the White House help or hinder remains up in the air. (By Richard Beales)

Now or later. U.S. health insurers have had a good pandemic, but Cigna’s third-quarter results show they will do fine afterwards, too. In the year’s first half, premiums poured in but fewer people visited doctors for fear of catching Covid-19. Even if some of these are postponed indefinitely, patients are now somewhat catching up. Cigna’s medical care ratio – or the percentage of premiums spent on healthcare – rose to 82.6% compared to 80.5% in the same period last year.

Earnings per share rose 6% though, beating analyst expectations on both the top and bottom line. Cigna raised its revenue estimate for the rest of the year. Even once life returns to normal, Cigna is well-positioned. The health insurance industry simply isn’t that competitive. Three-quarters of American metro areas have highly concentrated insurance markets, using the Herfindahl-Hirschman Index. That’s something even Democrats in Washington have struggled to change. (By Robert Cyran)

Second thoughts. The pandemic appears to have cured UniCredit’s funding headaches. Despite making about half of its revenue in places like Germany, Austria and Eastern Europe, the bank run by Jean-Pierre Mustier suffered a risk premium due to Italy’s wobbly public finances. This meant UniCredit had to pay more for its capital than northern European rivals. In response, Mustier even unveiled a plan last year to hive off UniCredit’s foreign operations into a sub-holding company.

Such a carve-out is no longer needed, Mustier said on Thursday. The European Central Bank’s bond-buying spree has compressed Italian sovereign yields so much that the gap between Italian 10-year state bonds and their German equivalent is now just 126 basis points, from nearly 290 in mid-2019. As such, the expensive reorganisation no longer makes sense. Then again, Mustier could dust it off if M&A options materialised at home or abroad. (By Lisa Jucca)

End of the show. Milan’s famed La Scala opera house has become the latest cultural victim of the pandemic. A new lockdown set to start in Italy’s financial capital on Friday and a rash of Covid-19 infections among its musicians and singers forced the 18th-century theatre to scrap its usually bedazzling premiere, scheduled for Dec. 7, for the first time since World War Two.

This will be a sad loss for all the bankers, politicians and VIPs that annually attend Italy’s most sought-after gala. Intesa Sanpaolo’s boss Carlo Messina and Generali Chairman Gabriele Galateri were among the grandees who attended “Tosca” by Giacomo Puccini at last year’s kick-off. With new restrictions halting concerts, performances and exhibitions across the country, la dolce vita is on hold. (By Lisa Jucca)

Charitable donation. Investors may be getting overexcited about Covid-19 treatments. The head of the United Kingdom’s Vaccine Taskforce said on Wednesday that AstraZeneca could release a booster by the end of the year. This could in theory see it take a share of a $10 billion market, according to analysts at Morgan Stanley and Credit Suisse. The estimates assume the general public will need a dose each year and assume a price of $20 per shot.

AstraZeneca and Johnson & Johnson have already promised to make successful vaccines available at cost during the pandemic. Although the treatment may become as ubiquitous as the annual flu jab, it will be difficult for pharmaceutical giants, already under scrutiny for price-gouging, to make too much money. Shares of companies that have promised to develop remedies are outperforming the broader index of pharmaceutical and biotechnology stocks. But not all vaccines will succeed, and pharma investors may not see the financial benefits of those that do. (By Aimee Donnellan)

Case of red. Pour one out for Treasury Wine Estates. The $4.2 billion Australian vintner put on hold a plan to spin off its Penfolds label amid concerns about China imposing retroactive tariffs on imports from Down Under.

It has been a year to make any investor hit the bottle. A January profit warning over a glut of cheap U.S. wine sent Treasury shares tumbling 25% in a single day. Napa Valley wildfires, the pandemic hit to travel – a source of higher-margin sales – and Beijing’s anti-dumping probe have caused additional headaches. The Penfolds demerger, originally slated for next year, promised to uncork value, but the latest disappointments erased another 7% of market value.

Boss Tim Ford pointed to an uptick in premium sales, or bottles that cost at least A$10 ($7.16). The company should also benefit from bars and restaurants reopening in more regions. For now, though, it’s the China fear that has legs. (By Jeffrey Goldfarb)

Cash in the tank. Deutsche Lufthansa’s 10 billion euro state-supplied parachute is starting to look a bit small. Lower costs and the resumption of limited flights mean the German carrier is burning through 200 million euros of cash a month. That’s a massive improvement from April, when the airline was incinerating as much as 1 million euros an hour. Worryingly, it may not be able to maintain such a lean course.

Unveiling third-quarter results on Thursday, Chief Executive Carsten Spohr admitted the cash drain might climb to 350 million euros per month as the normal winter slowdown hits revenue. That implies Lufthansa’s day-to-day operations will have burnt through 2.1 billion euros by March. Throw in limited capital spending and finance charges, and Lufthansa will have eaten up more than a quarter of its reserves. Without a summer 2021 recovery, Spohr might be in need of a bigger parachute. (By Ed Cropley)


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