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Market Perspectives

Survive and Advance: An Earnings Season Update

Bradley P. Hinton, CFA

Co-Chief Investment Officer, Portfolio Manager

 

Greetings from Omaha, where the city is eerily quiet for the first part of May. Like many, we have missed the intellectual buzz of the Berkshire Hathaway annual meeting and related events in our backyard. We hope to see clients, fellow investors and friends back in town again next year.

We are midway through a most unusual earnings season. Our companies are reporting quarterly results, offering opinions on business conditions and answering questions from analysts and investors. What follows is a brief summary of what we are hearing.

First, extreme uncertainty is the common, unifying theme. We are in uncharted waters in the COVID-19 battle, and nobody knows what the next few quarters hold. Let me repeat, nobody knows how things will unfold for the rest of 2020. Even the wisest company management teams are reluctant to hazard a guess. The range of potential outcomes has gotten wider, especially for the 2020-2022 outlook.

Second, times like this remind us that we own actual businesses — not just stocks. And the businesses we own are managed by people we can count on to make sensible decisions on our behalf behind closed doors. These management teams must continue to run their businesses amid heightened uncertainty, and they are all taking steps to protect their employees, serve their customers and prepare for a range of scenarios. Moments like these are the reason we focus on finding high-quality companies with leaders who can thoughtfully manage through critical situations. Decisions being made right now, every day, in real time, will shape companies' futures.

Third, the phrase “control your own destiny” has taken on new meaning during this crisis. The pace and degree of business interruption in many industries has been breathtaking. A lot of companies are responding to revenue scenarios that would have been almost unimaginable a few months ago. We are pleased with the way our companies stack up in terms of balance sheet, liquidity and durability. While times are tough, they still have options and pathways to “make their own breaks.”

We especially value the pragmatic mindset and resolve of CEOs like Andy Silvernail from IDEX Corporation, who — in a recent earnings call — described the difference between defensive and offensive liquidity well:

"So, there is liquidity that is to survive that a lot of people are having to utilize. And at the end of this, they will have a stretched balance sheet and a very difficult circumstance. That is not our situation, and I don't want it to be our situation. Our drive and why we have so much focus on this break-even level of cash flow is because I want a balance sheet that is deployable, aggressively deployable as the world starts to settle itself. And so, if we can maintain this north of $1 billion of liquidity, as cash flows become more certain, and the markets stabilize, we will get aggressive, no doubt about that.”

In sum, we hear grounded voices that blend a healthy respect for downside protection with an eye to preserving long-term growth avenues. I'm reminded of the mantra in the March Madness basketball tournament — “survive and advance.” Coaches do not care about style points or degrees of difficulty when every game is win or go home. We see parallels to today's business and investing environment. For us, the takeaway is to resist the temptation to be contrarian for its own sake. Especially after April's rally, now is no time to shoot for the moon.

Like our companies' management teams, we have been adjusting our forecasts to reflect new realities. There is no “one size fits all” description for these adjustments, which to me (a) confirms they have been done thoughtfully and (b) makes them more credible. I am very proud of our investment team's intellectually honest, thorough and adaptable approach to new information. My sense is that our base scenarios are more conservative than what the market expects. We continue to stress-test our models with humility and respect for the unknown. After several years of upgrading business quality, we like what we own and think our portfolios remain well positioned for long-term success.

So much has changed over the past few months. In these trying times, we are especially grateful to our investors for allowing us to steward their assets. At Weitz, our team is proud to invest alongside our shareholders. We do this because we believe in what we do, and we cherish the ever-important connections we maintain with our investors. As we wait for the days that the eerie quiet in our cities gives way to the welcome sounds of spring and summer again, we remember that we're all in this together, and together we will enjoy brighter days ahead.

 

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