Should You Be Afraid of These Zombie Companies?

More than 200 companies no longer have sufficient cash flow to cover interest expense.
Anthony RussoJan 01,2021,15:00

Even with the stock market rally of the past two months, some companies are stuck at zombie status.

During the coronavirus pandemic, more than 200 corporations have turned into so-called zombie companies, according to Bloomberg data of 3,000 largest publicly-traded firms in the U.S. Those companies have added a cumulative $1 trillion of debt to their balance sheets since the beginning of the pandemic, bringing the total to $1.98 trillion, the report showed.

Now, these once-almighty corporations are no more and no longer have enough cash flow to pay interest expense. In other words, Covid-19 has sucked cash out, turning the corporations now into the walking dead.

If you owned shares in major players in the traveling industry including cruise and airliner segments prior to Covid-19, you were likely left disgruntled.

The pandemic has not only limited traveling but changed the way consumers buy goods. Thus, some non-essential retailers (especially ones that rely heavily on brick and mortar) have watched their financial obligations pile up.

However, thanks to the encouraging news on the vaccine front, zombie companies have been returning to life. But still, it will take months before the U.S. hits critical mass with the vaccine.

Let’s look at some zombie stocks for those to avoid and those to consider.

Stay Away From Zombies Like Marriot

One zombie stock in the travel industry I’ve been bearish on is the hotel chain Marriot International (Nasdaq: MAR).

After the euphoria on the vaccine news hit the markets in early November, investors were quick to turn to the world’s largest hotel chain. Since then, shares of Marriot climbed 26%. In addition, Marriot turned back to profit in the third quarter.

However, there’s bad blood in this stock that you’ll want to avoid for the time being. Its revenues in Q3 came at just $2.3 billion versus $5.3 billion in the same period in the preceding year.

Also, Marriot has big debt. As of September, its debt topped $11.81 billion.

And the stock is quite expensive, currently trading at 242 times its earnings.

There is more pain on the way for shareholders of Marriot as analysts expect the company to post a loss of 21 cents per share in the full year 2020.

If you’re going to consider the hotel industry, I have recommended shares of Hyatt Hotels (NYSE: H) and Park Hotels & Resorts (NYSE: PK).

Choose United Over American

The airline sector has watched four major players this year become zombie companies in 2020, accumulating a total of $128 billion in debt, according to Bloomberg.

The largest debtor among major U.S. airliner has been American Airlines (Nasdaq: AAL), whose debt, pension, and lease liabilities sat at $47.5 billion at the end of the third quarter.

In the fourth quarter, American Airlines anticipates its cash burn rate to be $30 million on average.

But even with its cargo full of debt this year, AAL stock posted a 40% gain since the encouraging vaccine news in early November.

The good news? Airliners including American will get some relief in the $900 billion relief package that was just signed into law by President Trump despite veto threats. The package includes $15 billion in aid for airliners, which will help American bring back 19,000 of its furloughed workers.

According to Motley Fool, American Airlines could generate nearly $2 billion of “free money” thanks to the rescue package. However, that will only do so much for the $47 billion-plus hole it finds itself in.

Instead of American I would consider United Airlines (Nasdaq: UAL) if you’re looking for a zombie stock that has a chance to rebound next year.

While the stock has gained 26% since the vaccine news, its shares have halved this year.

As of Oct. 15, United Airlines had $28.25 billion in total debt.

Macy’s Zombie Parade

Then there’s the zombie stock of Macy’s (NYSE: M), which was forced to temporarily shut down its stores in the spring because it was deemed a non-essential business.

But even before the pandemic Macy’s had already been struggling. Since July 2018, shares of Macy’s have retreated 70%.

The decline has been attributed to plunging sales, inability to keep up with competition, and its poor credit rating.

According to Bloomberg, Macy’s debt has widened by $1.2 billion in 2020.

Some positive light on this walking dead stock: Macy’s should see some demand this holiday season and it looks like (at least for the time being) it will avoid bankruptcy as some initially feared earlier.

However, that could change if Covid-19 rages even more after the new year. Another lengthy shutdown for Macy’s and things could get uglier.

But even if it avoids another shutdown, Macy’s will need to prove that it can generate sales growth again when normal life returns in 2021, or this company will remain a zombie.

From corporate domination to zombies—it’s been a scary year for shareholders.

Could Zombie Status Disappear When Life Returns?

After post-vaccine gains, now probably isn’t the best time to be purchasing shares of zombie companies. In fact, economists have for a while warned about betting in favor of zombie companies because of their lack of productivity, spending on capital and growth in terms of assets and employment.

But even companies that have recovered from zombie status are three times more likely to return as zombies again compared with firms that have never been one, a September research report by the Bank for International Settlements showed.

“The zombie disease seems to cause long-term damage also on those that recover from it,” economists Ryan Banerjee and Boris Hofmann said in the report.

Further, “A firm’s viability should be an important criterion for its eligibility for government and central bank support.”

The year 2020 has been a difficult one for most industries. If zombie companies were not infected before the pandemic, they will have a shot to recover (and hopefully not relapse) once normal life comes back.

Beware of zombie companies and hold off buying, as another sell-off looms ahead.

Disclaimer

The opinions expressed in this article do not reflect the position of CapitalWatch or its journalists. CapitalWatch has no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only and does not constitute financial, legal, or investment advice.

Topics:American Airlines, Marriot International, United Airlines, Macy's, Hyatt Hotels, Park Hotels & Resorts.
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