With the stock market in a bear market and economic forecasts growing more dire by the day, it's clear that few companies will emerge unscathed from the coronavirus recession.
The coronavirus recession will slam just about every company in just about every sector.
But some are more at risk than others.
In particular, I'm talking about companies that were already struggling to cover the interest payments on their debt (the so-called "zombie stocks") as well as companies with below-investment-grade credit ratings that will find it harder to borrow in an economic crisis.
And make no mistake; the U.S. economy faces an economic crisis today at least as severe as the one it faced in 2008. The urgent need to stop the coronavirus from spreading has forced many state and local governments to halt most economic activity.
The suddenness of this is hitting U.S. companies like a tornado.
James Bullard, president of the St. Louis branch of the Federal Reserve, told Bloomberg that U.S. gross domestic product could fall as much as 50% and unemployment could rise to 30% -- higher than the all-time record high of 24.9% reached at the height of the Great Depression.
And the scariest aspect is that we don't know how long the economic clampdown will last. Lifting restrictions too soon could result in a resurgence of new cases of coronavirus. It won't be an easy call.
Meanwhile, credit-monitoring agencies like Moody's and Standard & Poor's have already started downgrading the ratings of companies or putting them on watch for a downgrade.
It's hard to say which major U.S. companies could go down as a result of the coronavirus recession. The Trump administration, the Federal Reserve, and Congress have all taken steps to help businesses get through this.
But as we saw with General Motors Co. (NYSE: GM) in 2008, it's possible for a company to get a bailout while leaving shareholders holding worthless stock.
Investors need to bear in mind that as the markets continue to falter, not every battered stock is a buy. Some at-risk companies should be avoided because this crisis could prove to be fatal - particularly if it drags on longer than many are now predicting.
Boeing Co. (NYSE: BA): The past year has been difficult for Boeing as a result of problems with its 737 Max passenger aircraft, which has been grounded globally pending fixes to the plane's flight controls. But the scandal halted sales of the plane and pushed shares of the stock down about 23% before COVID-19 shocked the markets. Buyout or no, Boeing faces a lot of headwinds. That includes slowdowns or cutbacks in its defense contracts on top of a decline in orders from the world's airlines.
S&P downgraded Boeing to BBB - the lowest investment-grade rating - March 16. It also placed the company on a credit watch with "negative implications." Moody's has an equivalent rating and has the company on review for a downgrade closer to speculative grade.
Boeing's situation could easily deteriorate with its main customers, the airlines, which are under duress and needing to conserve capital themselves. And more bad news: Boeing's interest coverage ratio is -2.13 - yes, that's a negative number. That means Boeing is losing money, making it hard to keep up on its interest payments. And those payments are growing quickly. The aircraft maker's long-term debt has zoomed 146% over the past 15 months.
Hertz Global Holdings Inc. (NYSE: HTZ): Hertz was on my list of Zombie stocks in 2018, and it has struggled since. Net income was negative in 2019 - before the coronavirus crisis. Now, with the travel industry almost at a standstill, life has gotten much more difficult for the car rental giant. HTZ shares have fallen as much as 83% from their Feb. 20 peak. Moody's dropped Hertz's credit rating to B3 on March 18, deep into speculative territory. It also revised its outlook from "stale" to "negative." S&P has a B+ rating on Hertz debt - also well into speculative grade.
Meanwhile, Hertz's interest coverage ratio is barely over 1. The impact of the coronavirus crisis could be the blow that pushes this company to the brink.
But while travel-based companies have gotten hit hard, another sector that was struggling even before all this happened faces an existential crisis...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
Macy's Inc. (NYSE: M): Brick-and-mortar retailers have been suffering from the transition to online shopping for more than a decade. Now the coronavirus crisis is speeding up that transition. Macy's said this week that it has already drawn down all of its $1.5 billion credit facility. Goldman Sachs now rates it a "Sell," and has cut its price target from $12 to $4. Macy's also has net debt 5.4 times its expected earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR), well above the healthy ratio of 2 to 3 times. The company's cash flow shrank by 50% last year and will surely shrink further in 2020. Moody's estimates sales at U.S. retailers will fall as much as 3% this year, putting even more strain on this already-pressured sector.
Moody's has kept Macy's credit rating at just barely above speculative grade but changed its outlook from stable to negative on March 5. S&P lowered its credit rating on Macy's debt to speculative grade on Feb. 18. With its stores forced to close while it was navigating the early stages of a tough transition to e-commerce, Macy's future is murky at best.
Party City HoldCo. Inc. (NYSE: PRTY): This specialty retailer already took a bath last November as it suffered from a helium shortage - a vital commodity when you sell party balloons. And sales were slowing before the coronavirus hit. When the company reported earnings March 12, revenue was down 9.2% with net losses of $2.88 per share. Same-store sales were down 5.1%. The stock is down an alarming 90% over the past six months.
Moody's downgraded Party City's credit rating to B2 last November, well into speculative territory. S&P also has a junk rating on Party City debt. The company's interest coverage ratio is barely over 1, so any coronavirus-related disruptions this year to income will make it very hard for Party City to maintain its interest payments.
AMC Entertainment Holdings Inc. (NYSE: AMC): Normally people go to the movies to escape life's problems. But now the theaters are shuttered. Moody's downgraded theater chain AMC to B3 on March 24, with another downgrade possible. S&P put the company on a negative watch March 16.
Weeks with no revenue will create a negative free cash flow situation, which will be a problem for a company holding nearly $5 billion in debt. AMC's interest coverage ratio is below 5, so it's already having trouble making its debt interest payments. This week it announced it had drawn down nearly all of its available credit. One analyst, Eric Handler of MKM Partners, estimates that if theaters remain closed, AMC can survive just four months.
Tom Gentile rarely opens the doors to his command center... but today, he's granting virtual access to explain exactly how the markets have been impacted by the COVID-19 pandemic. He's going to dig into the market's most crucial areas: stocks, bonds, the dollar, gold, oil... and show you where each sector stands - and where they're headed next. Tune in right here.
Follow me on Twitter @DavidGZeiler and Money Morning on Twitter and Facebook.
