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Article | Executive Pay Matters

Materials sector financials jeopardized by COVID-19 shutdown

Executive Compensation
COVID 19 Coronavirus

By Niko Soforo and Chris Kozlowski | April 22, 2020

The earnings outlook for the materials sector may limit achievement of financial goals in 2020.

The economic damage caused by the COVID-19 shutdown over the past two months has been unprecedented. The stock market has improved in recent weeks, but plans to reopen the economy remain murky.

Employers initially sprang into action to focus on the safety of their workers and establish new protocols for work and travel. Workforces have been reduced by both subtle actions, such as hiring freezes, and blunt actions, such as furloughs and layoffs. Pay constraints and cuts are also on the table.

Against this backdrop, we explore the impact to date of the COVID-shutdown on the materials sector of the S&P 1500. The sector includes about 90 companies in the following industries:

  • Chemicals industry (50%)
  • Metals and mining industry (23%)
  • Containers and packaging industry (14%)
  • Other industries, including paper and forest products and construction materials (13%)

Figure 1 tracks year-to-date shareholder returns for the sector overall and for its industries through April 9. Overall the sector is down 17%, below the S&P 1500, which is down 14%. Metals and mining as well as containers and packaging are showing the smallest drop. Those in other industries within the materials sector have experienced larger declines.

Figure 1. 2020 total shareholder return through April 9, 2020
Figure 1. 2020 total shareholder return through April 9, 2020

Source: S&P’s Capital IQ database. 2020 YTD through 4/9/2020.

Investment analysts have a dim outlook for the materials sector. Demand is generally tied to the overall economy, and as the COVID-19 shutdown is impairing the overall economy, most companies in the sector are also being impaired; however, there may be some emerging opportunities as more companies pivot to new products in short supply (e.g., medical supplies).

Figure 2 illustrates the change in 2020 expectations from January through April. Analysts have lowered revenue expectations across the board, with metals and mining having the largest decline in expectations. Earnings before interest and taxes (EBIT) expectations have also been lowered by double digits for the sector overall and most industries within. The containers and packaging industry is tracking the closest to its early 2020 expectations. This may be due to the fact that many consumers are moving to online shopping during this time of social distancing, so its financials may be somewhat immune from the shutdown.

Sector/industry             YTD change in estimated 2020
Revenue EBIT
Materials - 6% - 17%
Chemicals - 7% - 23%
Containers and packaging - 2% - 7%
Metals and mining - 9% - 41%
Others - 3% - 14%

Figure 2. Year-to-date change in estimated 2020 financials as of April 9, 2020

Willis Towers Watson surveys suggest that annual incentives for 2020 will be deeply impacted by the COVID-19 shutdown. Companies are anticipating a range of possible actions, such as:

  • Adjusting previously approved targets
  • Reducing threshold goals
  • Applying discretion at year-end
  • Changing performance metrics
  • Adjusting the performance period

Such adjustments should not be undertaken lightly as they are sure to be heavily scrutinized. With earnings falling so far behind within the materials sector, companies should adopt a disciplined framework for evaluating whether and how incentives should be modified. As a starting point, companies should consider the impact from financial, social, competitive and historical perspectives, then prioritize their motivation for taking action — or standing pat.

Authors

Lead Associate, Executive Compensation (Chicago)

Associate Director, Executive Compensation (Pittsburgh)

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