One Way to Learn about Industries

You don't always have to read boring Industry Reports

One reason I like reading annual reports and earnings transcripts is because I learn a lot about the sector, the industry and the market. Sure, you could read industry reports which will probably give you a more comprehensive picture but where’s the fun in that? I find it far more entertaining to learn about industries from companies.

For example, when you look at reports for Paypal or Square, you get a fair amount of information about the online payment industry, the risks companies face and the potential for long term growth. I actually used this recently for an investment proposal I was doing for a local payment provider. I learned a lot.

No company due diligence is complete without proper Sector or Industry Due Diligence. You can learn everything you need to know about a company, but if you don’t have an eye on the industry, you could miss opportunities or end up losing money. I’m sure you already know this by now.

But often you’ll want to also keep an eye on industries that indirectly affect your stocks.

One example is Simon Property Group ($SPG), who just reported earnings yesterday (08 Feb 2021).

I don’t hold this stock, nor have I ever owned it but, this company is a major player in the retail real estate space and even owns a few retail brands. Results for companies like this can give you a pulse of where the economy and the markets are heading in general. I’m also a little biased towards looking at this Group, having worked for a real estate and hospitality group for two years.

I’ll do a quick review of what I’ve learned from the Q4 2020 press release and how I think it helps. Some of this may seem a little disorganized because I’m writing this just as I’m reading and interpreting the results so you know exactly what I’m thinking.

The numbers presented are for Q2, 2020 through Q4, 2020.

$13billion raised in the debt and equity markets

  • If banks have confidence in this company, to me that’s a good sign.

  • However, it also means that the company may have mortgaged some of its assets to get loans. To me this also means that the company may get into trouble once the properties are re-valued because it's likely that property values will fall.

  • Two reasons for property values to fall - people sell at distressed prices bringing comparable sales values down or the cash flows the properties generate fall so the value falls (discounted cash flow models).

$400million rent abatements (suspension of rent payments) for small business owners.

  • It’s no secret that small and medium businesses (SMBs) are the hardest hit in the pandemic. In my experience, rent is one of the biggest expenses for retail SMBs. So this tells me that Q4 was not very good.

  • Q2 abatements were $204 million, and Q3 was $65million. Cumulatively it’s now $400million meaning, the number just for Q4 was $131million - an upward spike.

  • It also tells me that at some future point the SMBs are going to have to pay this. So life may get better for SPG down the line but, SMBs will still struggle to get back on their feet as they will have to make good on these deferred rent payments.

Write-offs due to tenant bankruptcies was $102million

This number was $64million in Q2 and $15million in Q3, 2020. While things improved remarkably in Q3, bankruptcies increased in Q4 to $23million.

90% Collection Rate on Billed Rentals

This looks like a great number on the face of it but when you look into the breakdown, you realize that the company has actually deferred a number of rentals and they’ve taken out the lost rentals due to bankruptcies. So when you add these back, the collection rates are actually 74% compared to gross contracted rentals. However, when I compare this to the numbers for Q2 (46.9%) and Q3 (78.6%), I can clearly see that there has been some improvement, with rental payments coming in.

All this is just from the press release. I’m quite sure the 10K and Earnings Transcripts will add value as well.

While the Group did miss earnings estimates, their liquidity and balance sheet remains very strong. Even with Covid, the Group generated $3.2billion in cash flows for the year 2020, down from $4.3billion during the year 2019. That’s a drop of 26% which is not all that bad considering what the world has been going through. So, when you hear people say regular retail is dying, now you have something to say.

There are other names out there I don’t necessarily own but will look at just for the industry:

  • Oil Majors - Chevron, Exxon, BP, Total, KMI

  • Banks - JP Morgan, HSBC, Goldman Sachs, Morgan Stanley, Bank of America, Wells Fargo

  • Metals & Mining - Barrick, Alcoa, FCX

  • Aviation - American Airlines, Southwest

You don’t have to look at them too intensely. An overview will give you enough information to get a sense of what’s going. If you have the time to really read through them, even better.

I hope that this has been helpful and I hope you will start looking at 10Ks & 10Qs for more than just the numbers because there’s always a story behind the numbers.

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