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Article | Executive Pay Memo North America

Industrials struggle to keep investor confidence

Aerospace|Executive Compensation
COVID 19 Coronavirus

By Lizett Meraz and Alex Ha | May 29, 2020

COVID-19 has caused 2020 revenue and earnings estimates to tumble.

The COVID-19 pandemic will leave its mark on the industrials sector for years to come. Airlines continue to struggle with major players each reporting first quarter losses. Famed investor Warren Buffet recently announced the sale of his entire airline holdings, further inciting fear across an already shaky investor community.

Elsewhere in the industrials sector, employers have been busy establishing or enhancing safety and travel protocols for their workforces, implementing pay reductions in conjunction with hiring freezes, furloughs and layoffs, and building up their balance sheets for what’s to come.

Against this backdrop, we explore the impact to date of the COVID-19 shutdown on the industrials sector of the S&P 1500. The sector includes about 230 companies in the following industry groups:

  • Capital goods — 66%
  • Commercial and professional services — 19%
  • Transportation — 15%

Figure 1 tracks year-to-date shareholder returns for the sector overall and for its industry groups through May 15. Overall, the sector is down 27%, more than twice below the S&P 1500’s 10% drop.

Figure 1. 2020 total shareholder return through May 15, 2020
Figure 1. 2020 total shareholder return through May 15, 2020

Source: S&P’s Capital IQ database.

Investment analysts have a dim outlook for the industrials sector as the full financial impact of the COVID-19 shutdown remains unclear.

Figure 2 illustrates the change in 2020 expectations from January through mid May. Analysts have lowered revenue expectations across all three industry groups leading to an overall decrease of about 12%. Overall, earnings before interest and taxes (EBIT) expectations have been cut by 30%, with the largest reductions coming for the transportation industry group.

 
Sector/Industry group YTD change
in estimated 2020
 Revenue     EBIT
Industrials sector – 12% – 30%
Capital goods – 13% – 29%
Commercial and professional services – 9% – 29%
Transportation – 13% – 41%
Figure 2. Year-to-date change in estimated 2020 financials as of May 15, 2020

Source: S&P’s Capital IQ database.

Given the profound impact COVID-19 has had on the current market, companies are anticipating a range of possible actions related to 2020 annual incentives, with the majority of organizations considering to adjust previously approved target goals or apply discretion at year-end. Regarding potential long-term incentive adjustments, despite COVID-19 decreasing analysts’ expectations, the majority of companies are taking a wait-and-see approach.

While proxy advisors anticipate adjustments in annual incentive plans, plan modifications should be explained clearly as they will be heavily scrutinized. With earnings falling so far behind within the industrials 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

Senior Associate, Executive Compensation (Chicago)

Associate Director, Executive Compensation (Chicago)

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