Following the announcement of a potentially “highly effective” coronavirus vaccine from Pfizer, investors are starting to think about recovery from COVID-19 and what this means for their portfolios.
One of the biggest questions on investors minds is which stay-at-home picks will continue to deliver in a post-COVID world?
When the positive news about Pfizer’s trial vaccine came out, many of the big name stay-at-home stocks, such as Zoom and Netflix, sold off as investors scooped up some of the beaten-down “real economy” stocks, such as airlines and energy shares.
However, even with a vaccine, some stay-at-home stocks will be here for the long-term. Barclays equity analyst, Julien Roch and his team broke down their strategy for evaluating which stay-at-home picks will deliver value for the long-haul.
The team looked at 10 European companies, such as Boohoo, ASOS and Just Eat Takeaway, which have been considered COVID-19 winners and applied two key questions to help find which companies could remain winners in a recovery scenario.
Question 1: How sustainable are 2020 tailwinds?
To answer this question, Barclays’ analysts apply four factors:
Factor 1: Has service become permanently better?
“Whilst there is some inertia about an offline/online shift, for the C-19 tailwind benefit to be really sustained, we argue the online experience needs to be sustainably improved, or the offline experience permanently impaired,” Roch said.
In this case, the analysts see delivery services, such as Just Eat Takeaway and Delivery Hero, improve as they have broadened supply side services. Companies like online fashion retailers ASOS and Boohoo will be impacted as they are “selling much of the same thing, in the same manner post-Covid.”
Factor 2: Has service become sticky on the consumer side?
“Sticky” refers to customers that have loyalty to the brand. A “sticky” product is one that has characteristics that deepen relationships with customers over time, which then builds loyalty to the product and increases customer usage.
Barclays’ analysts evaluate stickiness by the order frequency and the penetration.
The lower the customer penetration, the better, Roch said. This is because it give users an opportunity to learn a new experience that could stick, he said.
Barclays’ analysts identify meal kits, online pharma and food delivery in emerging markets as the categories with least maturity, while fashion is seen as most mature.
Factor 3: To what degree is the offline experience impacted?
“The more the offline experience has a chance to improve post vaccine, the worse it is for online,” Roch said.
Fashion is the category most exposed because it isn’t possible to try on clothes right now, Roch said. Meal kits could also face some headwinds when consumers return to pre COVID-19 dining habits. However, Roch notes that delivery trends remained strong during the summer months, which was when many restaurants in Europe reopened.
Factor 4: How much is the acceleration?
“Obviously the greater the acceleration, the more the room for modelling error,” Roch said.
HelloFresh, the meal kit provider, is most exposed in this space, as the analysts believe visibility is limited.
Question 2: How are multiples looking?
After asking the first questions, investors then need to look at multiples.
Barclays’ analysts evaluate three components when it comes to these metrics:
Compare pre and post COVID-19 multiples
This helps analysts identify stocks that have rerated and de-rated on 2022 estimates, showing where markets are factoring in long-term benefits from COVID-19.
“Our takeaways here are that: 1) food delivery has not rerated (indeed JET has derated on the Grubhub deal), whilst fashion and pet care has rerated,” Roch said. “Zalando seems most justified here. Then online pharma has also rerated – but due to a step change in regulation. Boohoo has derated – but there have been supply chain issues.”
“We look at the 2022E GMV / Sales of each company and compare that to the LT margin assumption in the outer years of our DCFs to create a “normalized” earnings,” Roch said. “We then look at the valuation on a normalized basis.”
Roch highlights that this is subjective but also believes it is a helpful sense check.
Growth adjusted margins
“We look at the 2021E EV/Gross Profit (net of fulfilment to compare 3P vs 1) vs the Gross Profit growth of our names,” Roch said.
The Stock Picks
From asking both of the key questions and evaluating the various factors, Barclays’ analysts identify two stocks that investors “can have the most conviction to keep owning, even in a rotation to value.”
The stocks are Delivery Hero and Zur Rose.
1) Delivery Hero
Category: Online food delivery
Target price: €117.00 (Reiterated on November 16 following an announcement on November 13 that South Korea’s antitrust committee believes Delivery Hero should sell its Yogiyo sauce subsidiary to enable purchase of food delivery app, Woowa )
Analyst commentary: “Delivery Hero (MENA has an easy comp, Woowa is a significant tailwind, EM markets will see a C-19 tailwind for some time, markets are immature, order frequencies are relatively high, service is improved),” Roch said.
2) Zur Rose
Category: E-commerce pharmacy
Target price: 310.00 Swiss Francs (Set on October 21)
Analyst commentary: “Zur Rose / Shop Apotheke (the acceleration in end ’21 and into ’22 is about regulation and e-scripts; not about C-19).”
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