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Corona Capital

20 October 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.


– Red states’ blues

Red states. New York is going to be in deep financial trouble if federal relief doesn’t come soon. The state and New York City could rack up $59 billion in revenue shortfalls through 2022, according to estimates reported in the Wall Street Journal. That’s directly related to issues created by the pandemic, says the Center on Budget and Policy Priorities, citing estimates that the state’s revenue will drop almost $30 billion this fiscal year and next.

That’s far higher than losses in most other states in dollar terms. Yet on a relative basis, plenty of states that pride themselves on being more fiscally conservative have as much or more to lose. New York’s revenue is set to decline 15% in the year to June 2021 from the level projected before Covid-19 hit, per the CBPP. Texas’s state revenue is set to fall by the same amount, and Nevada and Wyoming look in worse shape. Republicans may be holding up federal aid, but red states aren’t exactly in the black. (By Lauren Silva Laughlin)

Gamble and prosper. It pays to be skeptical when analysts kick off their questions on a company earnings call with words like “congratulations,” “terrific” and “awesome.” That said, Procter & Gamble is, as they might put it, crushing the pandemic. The $350 billion consumer-goods behemoth reported net sales up a whopping 9% year-on-year in the quarter to Sept. 30. The company’s home care business – basically cleaning products – saw organic sales increase more than 30%.

More than a tenth of the boost to P&G’s top line came from the mix, meaning a shift toward more expensive brands from cheaper and private-label alternatives. This was particularly notable in the fabric and home care segment. Further along the supply chain at U.S. grocer Albertsons, the mix similarly shifted, improving the company’s gross margin in the last quarter. When people are fighting a deadly virus, only the best will do. (By Richard Beales)

Couch bonus. UBS, the $45 billion Swiss bank which caters to the global elite, is an unlikely advocate of workplace egalitarianism. Yet Sergio Ermotti, the outgoing chief executive, has given rank-and-file employees a parting gift. UBS announced alongside third-quarter results on Tuesday that staff at “less senior ranks” would receive a one-off cash payment equivalent to a week’s salary as a sign of appreciation for their contribution during a challenging year.

The $30 million cost is puny compared with the $4.9 billion of earnings UBS generated in the first nine months of 2020. But it is recognition that staff may be owed some of the savings that companies will make as home working becomes more popular, including lower rent and office-maintenance costs. UBS’s move is only a start, but the bank’s workers have at least registered a small early win in the looming tussle over sharing those savings. (By Liam Proud)

Miracle cure. Chinese biotechnology firm Sinovac’s experimental coronavirus vaccine is gaining traction. On Oct. 20, preliminary results from a clinical trial in Brazil proved that its “CoronaVac” injection was safe for 9,000 volunteers. At home, the company’s chief executive told Reuters that 90% of all employees and their families have been inoculated, while the city of Jiaxing has begun administering doses to its medical professionals.

Assuming the vaccine works, it will be a feather in the cap of the country’s biotechnology industry, particularly as competing candidates from AstraZeneca and Johnson & Johnson have halted trials due to safety issues. It will also be a carrot for Chinese diplomats to offer, or deny, foreign governments. For Sinovac, a global lead in the vaccine race might lead to a windfall profit, but unfortunately investors can’t trade it. The company’s Nasdaq-listed shares have been frozen since February 2019 following a messy legal battle for control. Making money from the public good can be tricky business. (By Pete Sweeney)

Penetrating insight. That the pandemic’s need-for-clean would fuel sales of disinfectant products like Reckitt Benckiser’s Lysol was never in doubt. But who knew all those lockdowns would dampen sexual activity? That’s one takeaway from the consumer-goods group’s latest set of results. Having slid in the first half, sales of Reckitt’s Durex condoms and “sexual wellbeing products” stiffened in the third quarter amid relaxations of social-distancing regulations and in markets where infection rates materially declined, such as China, where it also launched its new, thinnest condom.

The result: like-for-like sales in Reckitt’s health business, representing 35% of revenue, rose nearly 13% to 1.2 billion pounds. But with Covid-19 cases again rising, the surge may be temporary. Contraception notwithstanding, “there is also evidence that birth rates will be further lowered in coming quarters as a result of behaviour changes related to the pandemic,” Reckitt notes. So much for animal spirits. (By Rob Cox)

Button bashing. Video-game kit and snazzy webcams are apparently the pandemic equivalents of shovels in a goldrush. Just ask Logitech Chief Executive Bracken Darrell, who on Tuesday raised his revenue growth forecast to 35%-40% from 10%-13% for the current financial year. Sales rose by 50% in the six months to Sept. 30, led by the Swiss-American group’s “video collaboration” division. Logitech’s shares rose 20% on Tuesday, giving it a $16.4 billion market value.

That seems excessive. The company now trades at 39 times the earnings analysts expect it to generate over the next 12 months, using Refinitiv data, compared with a two-year average multiple of 21. The risk is that sales slump next year, once gamers and home workers have all the headsets and keyboards they need. Rather than a goldrush, the computer-gadget boom could be a blip. Logitech’s ebullient investors may want to think about hitting “Escape”. (By Liam Proud)

Garden hedge. Move over Amazon.com and Apple – gardening is blossoming as the new growth sector. Sweden’s Husqvarna, a $6.7 billion maker of lawn mowers and hedge trimmers, more than doubled operating profit in the quarter ending September to $113 million as office workers spent more time at home, and less on the daily commute. Holidaying in the back garden rather than on a foreign beach also played its part.

With the northern hemisphere winter looming, Husqvarna’s next quarterly sales harvest may look a bit weather-beaten. But that’s unlikely to cut back the stock’s nearly 40% year-to-date gains. If predictions of an exodus from big cities like London and New York prove correct, new homeowners will be snapping up lawn mowers next year. Gardening’s recession-proof status should lend further support, as indeed might climate change: less rain means more irrigation systems. For investors, that makes for a rare triple-thick hedge. (By Ed Cropley)


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