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Investment

Expect Harvey and Irma to return… in companies' earnings

Hurricanes Harvey and Irma may have faded from the sky and news headlines, but you can count on them coming up again, this time in company conference calls.

All the big hurricanes live again in the quarters following their landfall in the U.S., according to a CNBC analysis of earnings calls transcripts over the past 12 years. Corporate executives blame the storms for lower-than-expected results, express support for those on the ground and cautiously report the pick-up in spending thanks to relief efforts. For the analysis, we focused on companies valued at $5 billion and more.

Generally, the costlier the hurricane, the more it’s mentioned in subsequent calls. Hurricane Katrina, which devastated Louisiana in 2005, caused an estimated $133 billion in damages and was mentioned nearly 500 times in the ensuing quarters. Hurricane Sandy, which struck New York City in 2012 and caused major infrastructure damage across the northeast, caused about $75 billion in damage and was mentioned over 400 times.

Harvey alone may have caused up to $108 billion in damages, according to initial estimates from Moody’s Analytics. There have been just north of 30 hurricane landfalls in the U.S. in the past 50 years, according to a research note from JPMorgan. (That doesn’t include Harvey and Irma.) Those storms have caused about $520 billion in damage, with numbers adjusted to 2017 dollars. Of those, only five have caused damage in excess of $25 billion.

Market watchers disagree on hurricanes’ impact on company earnings and the economy. One common refrain is that companies like Home Depot and Caterpillar benefit from the increased spending during the relief effort and the uptick in spending helps make up for some of the damage to the economy. But companies also say the damage to property and temporary productivity slow-downs are economic curses, even before considering the loss of life.

A major factor in hurricanes’ effect on business: simple shutdowns and changes in habit as people evacuate or hunker down to ride out the storm.

“Results in the quarter include unfavorable impacts totaling about $70 million due to Hurricane Matthew,” Disney CFO Christine McCarthy told investors in February 2017 of the October 2016 storm. “[Matthew] disrupted operations at Walt Disney World and resulted in the closure of our parks for about a day and a half.”

Comcast CFO Mike Cavanagh also blamed Matthew for closing the company’s Orlando amusement park for two days.

A number of retail stores blamed reduced revenue or increased expense ratios on Hurricane Katrina in their December 2005 calls. The CEO of pharmacy Rite Aid said that four stores were destroyed in the storm, and 13 more remained closed, but much of the pharmacy business had moved to other locations in the same area.

Other retailers said consumers had stocked up on emergency kits and storm-related gear. In October 2008, Tractor Supply Company reported quarterly sales growth of 17 percent and earnings per share of 21 percent, thanks in part to emergency preparation demand driven by Hurricane Ike.

Then-Home Depot EVP Craig Menear said that in just one week, the company saw a $70 million jump in sales including storm-related goods like batteries and generators as the country prepared for Hurricane Sandy. “Looking ahead it’s difficult for us to forecast the magnitude of ongoing cleanup sales in the affected areas,” he said in November 2012.

One feature of hurricanes, as opposed to earthquakes for example, is that there’s usually a few days’ warning. That allows people and companies to do what they can to prepare.

DuPont has a number of times had to shut plants down in the Gulf in advance of a storm. In 2008, the company shut down a plant in Orange, Texas, before being struck by Hurricane Ike. The company blamed the shutdown and storm damage for part of a 36 percent drop in earnings for the quarter.

Even for companies whose facilities aren’t directly affected, there can be a ripple effect. Michael Stores CFO Jeff Boyer told analysts as much in March 2006, after Hurricane Katrina disrupted shipping and consumers’ travel. “While it didn’t impact us from a store-base standpoint, it impacted us from a gas price,” he said. “We saw a real reduction in traffic for a while coming out of that.”

“Q1 was impacted greatly by Hurricane Katrina and the craziness of gas prices in September,” Costco CFO Richard Galanti told analysts in March 2006.

Then-Southwest Airlines CFO Laura Wright said in October 2005 that the company lost between $15 and $20 million due to the travel shutdowns following Katrina and Rita. Still, the year-over-year was not impacted “due to a similar impact from the four hurricanes we had in the third quarter of last year,” she said.

Jay Benet, CFO of Travelers Insurance, blamed Hurricane Matthew and Tennessee wildfires for $137 million in pretax catastrophic losses during a January call with analysts. Still, the company had an operating income of $919 million for the quarter, up 4 percent from a year prior.

The sheer size of Katrina caused Allstate to delay its standard catastrophe loss estimate in 2005, CFO Dan Hale told analysts on a call later that year. The company relied on historical trends and aerial photographs to estimate losses in some areas. After-tax catastrophe losses amounted to $3.06 billion for the third quarter that year, the company said. That was $1.95 billion more than the previous year’s third quarter.

Hale on that same call said the company purchased reinsurance for its exposure in Florida, Texas, New York, Connecticut, New Jersey and the Carolinas.

This year, analysts at a reinsurance roundtable in Monte Carlo on Sept. 10 said they expected Harvey to wipe out the catastrophe budgets for many reinsurers for the rest of the year.

David Flandro, head of global analytics at JLT Re, said Harvey’s unusual path would make the reinsurance industry rethink its ability to correctly predict the paths of future storms.

Many of the mentions are simply company executives offering thoughts and well wishes for their employees and customers affected by the storms. That’s particularly true when a storm is happening during the earnings call, but can also happen years later.

In August 2015, Walmart President and CEO Doug McMillon reflected on the decade since Katrina crashed into the Gulf Coast. “Throughout the devastation that the residents of this region faced, Walmart Associates demonstrated extraordinary courage and passion for these communities,” he told analysts. “I often think how simple acts of kindness can have a dramatic impact.”

Disclosure: Comcast is the owner of NBCUniversal, the parent company of CNBC and CNBC.com.

Source: Investment Cnbc
Expect Harvey and Irma to return… in companies' earnings

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