The COVID-19 pandemic has significantly altered all of our lives, and the advent of a vaccine is likely to do the same. The question for investors is, which sectors and companies will do well after a vaccine is rolled out?
I think there's a good case for arguing that food equipment company Middleby (MIDD +1.59%), paint and coatings company Axalta Coating Systems (AXTA 0.61%), and package delivery giant UPS (UPS +0.09%) are three companies set to do very well. Here's why.
Middleby and dining out
The food and food equipment sector has been one of the hardest to read in 2020. On the one hand, stay-at-home measures have boosted spending on the home and on ordering food or buying at grocery stores -- great news for Middleby's residential kitchen equipment and food processing equipment sales. On the other hand, restaurants and hotels have been particularly hard hit by the pandemic, and Middleby's commercial foodservice sales have fallen significantly.
Image source: Getty Images.
A break out of Middleby's earnings before interest, tax, depreciation and amortization (EBITDA) for the third quarter helps to demonstrate matters. As you can see below, the decline in the key commercial food service group sales was offset by gains in the residential and food processing segments' sales in the third quarter.
|
Segment |
Third Quarter Adjusted EBITDA |
YOY Change |
|---|---|---|
|
Commercial Food Service Group |
$83.3 million |
(34.1%) |
|
Residential Kitchen Equipment Group |
$27.9 million |
6.8% |
|
Food Processing Equipment Group |
$26.3 million |
51.2% |
|
Total* |
$126.5 million |
(19.4%) |
Data source: Middleby presentations. YOY= year over year. *Numbers do not tally with segment figures due to stock compensation figures in the total.
That said, the residential kitchen equipment segment's orders are coming back strongly as the economy opens up and dealers get back to work. In fact, year-over-year residential kitchen equipment orders were up a whopping 45% in October compared to a 53% decline in April when the pandemic spread out of China.
Similarly, the hard-pressed commercial food service segment's orders were only down 2% in October compared to a 65% decline in April. Middleby could suffer if restaurant closures lead to used equipment going on the market, but the commercial food service segment's orders look like they are about to turn positive.
Meanwhile, in common with UPS and Axalta, Middleby trades on a very reasonable price to free cash flow valuation right now. Throw in the possibility of a vaccine leading to a return to spending on dining out, and Middleby's commercial food service equipment sales could recover strongly in the future.
Data by YCharts
Axalta Coating Systems
It's no secret that growth in electric vehicles is going to disrupt the automotive industry in many ways, but cars will always need coating, and damaged cars will always need respraying. As such, Axalta can grow earnings over the long term irrespective of the type of vehicle produced.
The chart below helps to explain how Axalta makes money.
Data source: Axalta Coating Systems presentations.
Turning to more near and medium term matters, the vaccine will help the company in three ways:
- A pickup in economic and social activity will lead to more miles driven, and unfortunately, that means more automotive collisions. More collisions mean more refinish revenue for Axalta.
- A vaccine will lead to fewer automotive production shutdowns and greater demand for new vehicles -- possibly boosted by individuals not wishing to use public transport -- and that's good news for Axalta's transportation segment sales.
- An opening of the economy and a reduction in social distancing measures will lead to more industrial coatings sales as workers can get back on site.
Finally, as the first chart above shows, Axalta remains attractively priced -- and it doesn't hurt that Warren Buffett's Berkshire Hathaway also owns the stock.
UPS
The company stands to be a beneficiary of the pandemic, the vaccine, and the aftermath. It's no secret that the stay-at-home measures have accelerated the transition toward e-commerce sales, and in general, that's good news for package delivery companies like UPS.
Data by YCharts
Moreover, new CEO Carol Tome is seeking to take advantage of the surge in volume by shifting the company's emphasis toward making more money from deliveries rather than just chasing volume. As such, UPS could be set to match underlying volume growth with margin expansion.
In addition, the vaccine will help UPS as its delivery networks will play a key role in distributing it. That's a major plus for the company as healthcare is one of the company's key strategic growth drivers. As such, UPS is likely to emerge from the pandemic as a stronger company with enhanced long-term earnings potential.
