Steel billionaire Gupta shuffles reporting dates at GFG Alliance


Since October 2019, several executives from Sanjeev Gupta’s sprawling GFG Alliance have promised in media interviews a set of consolidated accounts for the group’s Liberty steel businesses, due in early 2020, which would provide greater transparency and enhanced governance. Recent public filings show that the group is still fine-tuning the details.

In particular, in early March, several of the group’s entities changed their financial year-ends from Mar. 31 to Jun. 30, according to filings with Companies House. This week, they changed the year-ends back again.

While companies can change their reporting year-end dates, it is unusual to do so twice in such quick succession.

A spokesperson for the group said, “As part of the global consolidation of Liberty Steel Group, we began a process of synchronizing accounting to a June year-end. However, a decision has subsequently been made to bring forward the combined year-end to March.”

A person familiar with the decision said that management very recently changed its mind on the reporting period due to the impact of coronavirus on the business. This person said that top executives believed the sudden economic changes ushered in by the global pandemic meant that reporting figures to March would give a better reflection of the business before the crisis hit the business.

The move is “certainly odd,” said Chris Higson, associate professor of accounting practice at London Business School. Businesses sometimes change their reporting periods — to align new subsidiaries with a parent company, for instance — but it’s unusual for companies to switch back and forth, he said.

Commodities magnate Gupta, 48, has built a global metals empire in just a few years, largely by picking up failed steel mills and other distressed businesses. The result is a complex global conglomerate — with operations in countries including Australia, the U.K. and the U.S. — which has also often been backed by opaque financing. The group’s companies have received billions of dollars, for instance, from Greensill Capital, a U.K.-based firm that specializes in so-called receivables financing arrangements. Under this form of financing, also known as factoring, the lender pays a company’s supplier invoices early, at a discount, and the borrower repays the amount later. Gupta was previously a shareholder in Greensill for several months.

Read: GAM scandal: inside the probe into star trader’s conduct

The company has previously eyed a public listing in Australia and the UK. Last year, Gupta made the promise to deliver consolidated accounts for the Liberty Steel Group of GFG companies. GFG said at the time that the group had 30,000 staff in 10 countries and annual sales of $15 billion.

Speaking at a conference in Italy last year, Gupta said “Our integrated group will stretch around the world, with a financial and governance structure suitable for an intercontinental business of our size.”

In January, the group appointed Neil Barrell — a former partner at accountants Grant Thornton — as group chief operating officer, saying his initial focus would be on consolidating the steel business as part of an effort to enhance governance and “move towards broader financial transparency.” However, Barrell died suddenly last month. Gupta said “Neil’s death has come as a devastating shock,” and paid tribute to his impact on the firm and on his colleagues.

More recently, GFG executives have given an update on the impact of coronavirus on its business. A statement issued by the group last week said it “continues to adjust production to demand on a plant by plant basis with its highest priority being the safety of its employees.”

The group has furloughed employees at some engineering businesses in response to the economic crisis brought on by the global pandemic, according to a person familiar with the matter.

Reuters reported last week that Liberty said the group’s steel mills in Britain, Poland and Romania would reduce production and that it had idled smaller rolling mills in Belgium, Luxembourg and Italy as well as three businesses in the U.K. that make components for the automobile industry.

Read also: An audience with Lex Greensill



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It’s Time To Have Sherwin-Williams On Your Radar (NYSE:SHW)


Paint/coatings manufacturer and dividend champion Sherwin-Williams Company (SHW) has long been a highly regarded stock of ours. SHW realized a drastic multi-year P/E expansion upon digesting its 2016 deal to acquire Valspar. As a result, the stock had become a bit overheated in a strong bull market. Now that the coronavirus has shaken the markets and pushed shares of Sherwin-Williams well off of highs, the time is right to refresh our coverage and examine where shares stand in respect to investors today.

Note: Our overview coverage of The Sherwin-Williams Company can be found: HERE.

Where Do Shares Stand Today?

Shares of Sherwin-Williams were coasting through the turn of the year, hitting 52-week highs at about $600 per share before the market got turned on its head. The coronavirus breakout cooled momentum before the US outbreak resulted in some of the most volatile market conditions in history during the month of March. Shares currently stand at $428, about 29% off of highs.

(Source: YCharts)

If we look at the company’s recently completed 2019 year, its EPS of $21.12 (adjusted) represented a 28.4X earnings multiple at its highs. This was a 13% premium to the stock’s 10-year median P/E ratio of 24.94X, so the sharp decline amidst the volatility was partly due to some P/E contraction.

This decline was also partly driven by some weakening in the company’s performance. When Sherwin-Williams closed out its 2019 fiscal year in January, operating results were a bit soft due to weakening of industrial and international segments.

With a large pullback, shares have definitely come “down to earth”. If we use the same 2019 EPS of $21.12, the current share price of $428 results in a much more reasonable multiple of 20.26X. This is actually a 19% discount to the stock’s 10-year median P/E ratio.

Looking At What Is Coming

Shares are definitely much more attractively valued at these new levels, but investors have to keep in mind that some short-term pain is likely ahead. The company will report its first-quarter earnings for 2020 at the end of April. Sherwin-Williams actually came out and reaffirmed its first-quarter guidance in mid-March, pointing to expected Y/Y net sales growth of between 2% and 5%. The company also noted that disruption due to coronavirus was primarily concentrated outside of the US market, meaning its prized network of Sherwin-Williams stores has been largely undisturbed to this point.

This is positive news heading into the quarter, but we are not expecting fireworks, as the continued drag that is carrying over from 2019 Q4 will likely remain an issue. The timing of the quarter also fails to capture the aggressive mitigation measures that most of the US has now implemented. Sherwin-Williams reaffirmed guidance for Q1, but we expect a cut to full-year guidance when the company reviews its earnings in a few weeks.

If we go back to the previous quarter, the company saw low-single digit sales declines in its Consumer Brands and Performance Coatings groups. The Americas group has been going strong with mid-single digit growth. This is also the company’s largest segment by far, contributing just over half of total sales.

(Source: The Sherwin-Williams Company)

The primary engine within the Americas group is the company’s network of more than 4,000 paint stores, concentrated in the United States. With most of the country undergoing aggressive mitigation measures (such as shelter-at-home orders), we expect headwinds in the months ahead. Much of the businesses that run through the stores are likely deemed as “essential” and will remain open (professional contractors, etc.), but we anticipate that the slowdown of economic activity will still have a material impact on sales. We expect customer projects to be put on hold, and companies that do remain in operation to operate at less than full capacity as people get sick and quarantine themselves.

Where Do We Go From Here?

Our attitude towards the stock is optimistic, yet cautious. From a pure valuation standpoint, Sherwin-Williams is attractively priced relative to historical norms. This is a blue-chip business that produces strong cash flows, and continually increases its dividend while generating strong capital gains for investors. Long-term investors looking to accumulate shares stand to do well over time as we work through the economic cycle resulting from coronavirus. As of now, analysts are actually bullish on long-term growth returning. Current analyst consensus is projecting 2021 EPS of $25.54, meaning the stock is trading at just 16.75X next year’s earnings.

With that said, we feel that the worst news of the US pandemic has yet to come, as cases continue to climb. We feel that full-year guidance will be reduced, and that it’s very feasible that shares could push below $400 in the day/weeks ahead. By averaging into a position, investors would be able to obtain shares at a solid value, while capturing further value as the stock works through what should be challenging times coming.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Sweden’s H&M sees second-quarter loss as pandemic slams March sales By Reuters


© Reuters. The H&M clothing store is seen in Times Square in Manhattan in New York

STOCKHOLM (Reuters) – H&M (ST:), the world’s second-biggest clothing retailer, reported on Friday a 46% plunge in March sales as the coronavirus pandemic took its toll and said it expected to run a loss in its fiscal second quarter.

The pandemic has forced H&M to temporarily close most of its stores, flag big layoffs and scrap its annual dividend for the first time since its 1974 listing.

“With the dramatic decline in the market we have to make many difficult decisions and take forceful action,” newly appointed Chief Executive Helena Helmersson said in a statement.

“With each day that we are having to keep stores closed, the situation is becoming increasingly demanding.”

H&M said that to strengthen its liquidity buffer, it had prepared a number of sources of financing that it expected to be finalised in the second quarter.

The company also said it expected to be able to cut operating expenses, excluding depreciation and amortisation, by around 20–25% in the second quarter while it slashed its planned capital spending for 2020 to 5 billion crowns from 8.5 billion.

Fiscal first-quarter pretax profit more than doubled to 2.50 billion crowns ($247.6 million) from a year-ago 1.04 billion. Six analysts polled between March 17 and March 26 had on average expected a rise to 1.47 billion crowns, according to Refinitiv data.

Inventories shrank for a third straight quarter but H&M said they would temporarily increase again due to the sudden drop in demand. While store sales plunged, online sales in March increased by 17%, the company said.

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‘Far more extreme than anything we’ve ever seen, including the worst weeks of the Great Recession’ — economist gasps as U.S. jobless claims jump 3,000% in 3 weeks


‘A portrait of disaster.’


Heidi Shierholz, a senior economist at the Economic Policy Institute

Initial unemployment claims jumped 3,000% to 6.6 million last week from 211,000 for the week ending March 7, the Labor Department said Thursday. Businesses have closed in an effort to stop the spread of coronavirus, as millions of Americans practice “social distancing” at home.

“This kind of upending of the labor market in such a short time is unheard of,” said Heidi Shierholz, a senior economist and director of policy at the progressive Economic Policy Institute, a Washington, D.C.-based think tank. She called the latest numbers, “A portrait of disaster.”

The $2 trillion stimulus package, passed by the Senate last week, will help the U.S. through the COVID-19 pandemic, of which New York City is now the epicenter, Shierholz added, but she added, “This kind of upending of the labor market in such a short time is unheard of.”

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“The spike at the end shows the unprecedented territory we are in right now,” she said, citing this graph (below), showing labor market trends over the last 50 years. “What the labor market is currently experiencing is far more extreme than anything we’ve ever seen, including the worst weeks of the Great Recession.”

The number of unemployed Americans is likely to surpass the prior record of 15.3 million, also seen during the Great Recession after the subprime-mortgage market crashed. Economists predict 25 million Americans or more could lose their jobs in the next few months, at least temporarily.


Department of Labor data presented by the Economic Policy Institute (above).

Shierholz said initial unemployment claims do not include many workers who are out of work due to the virus, including independent contractors, those who don’t have long enough work histories, those who had to quit work to care for a child whose school closed, so the actual number is higher.

‘The spike at the end shows the unprecedented territory we are in right now.’

“One of the most effective parts of the CARES ACT, the relief and recovery act that Congress passed last week, is a $250 billion expansion of unemployment insurance,” Shierholz said.

The $2 trillion stimulus package includes an increase in the level of benefits and the creation of a Pandemic Unemployment Assistance (PUA) program which would be available to many workers who are not eligible for regular unemployment insurance (independent contractors, for example).

The $2 trillion stimulus bill will pay workers $600 a week on top of whatever sum they receive in their state-level unemployment claim for a period of up to four months, according to provisions in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Coronavirus had infected at least 216,768 people in the U.S. as of Thursday evening and killed at least 5,148 people, with 1,374 deaths occurring in New York City alone, according to Johns Hopkins University’s Center for Systems Science and Engineering. Worldwide, there were 962,977 confirmed cases of the virus and 49,180 reported deaths.



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COVID-19 Will Be A Stagflationary Shock, Stay Long USD In The Short Term


The global economy was already declining before COVID-19

The past two years were marked by a constant slowdown in the business cycle after the global economy peaked in the last quarter of 2017. The rise of uncertainty globally, with Brexit at first and quickly followed by the US-China trade war and political risk in the euro area (France’s yellow vest, Italian elections…), generated a rising demand for the traditional safe-haven assets: US Treasuries and the US dollar. We previously saw that the rise in uncertainty has historically been associated with a stronger USD (figure 1, left frame). Even though global growth has constantly been weakening in the past two years, the market did not react and the 20-percent drawdown we saw in the end of 2018 was followed by a sharp recovery in 2019 due to the significant increase in global liquidity.

However, we do not feel very optimistic in the near to medium term despite the massive liquidity injections from the Fed and other major central banks. In previous downturns, equities have usually fallen for a longer-than-anticipated period despite an increase in liquidity. Indeed, rising excess liquidity tends to usually lead risky assets such as equities (by 6 months), but the relationship breaks down during recessions. We do think that COVID-19 will mark the divergence between excess liquidity and global stocks (figure 1, right frame).

Figure 1

Source: Eikon Reuters

More bearish than bullish for now

Two narratives are currently making the headlines: the first one is optimistic and predicts that the economy will be back on track by early June and that the ZIRP policies combined with depressed oil prices will generate a significant push in consumption in most of the developed countries, leading to a sharp recovery in the second half of 2020. The second narrative is more pessimistic: unemployment skyrockets around the world, creating a huge demand shock leading to social unrests in most of the countries.

It is clear for us that economies will have to temporally deal with massive unemployment, and then the question of social unrests will depend on how well governments will manage the global crisis (helicopter money, MMT…). There is no way that the economy will recover sharply in the second half of this year as social distancing will be implemented in a lot of countries at least in the beginning. It is currently fair to assume that the uncertainty of employees’ working status has never been higher than today; therefore, how could we expect consumption to recover sharply in H2 2020 when household net wealth and real disposable income, two important drivers of real consumption, are falling?

The reality is that households will save carefully in the coming months and consumption will remain depressed for a little while. As a result, it is hard to believe that we will see a sustained period of rising equities while consumption keeps deteriorating.

Hence, as we are heading towards a tough 18-month outlook, the buyers on dip should remain vigilant in the near to medium term. Figure 2 shows how Japanese investors would have performed poorly in the 1990s if they were rushing to buy the dip each time the market corrected.

Figure 2

Source: Eikon Reuters

‘This time is different’: we expect a stagflationary shock

To the difference of the 2008 Financial Crisis, the COVID-19 is a supply shock that will spill over demand in the coming months; as a result, these aggressive measures from governments will lead to more money in the system chasing fewer goods and could therefore generate an unexpected increase in inflation. We believe that COVID-19 will be stagflationary rather than deflationary and governments may have to eventually intervene to limit the appreciation of certain goods.

However, we agree that the services industry will suffer in the medium term as households’ spending will be significantly reduced in the coming months. For instance, as Variant Perception precisely mentioned in their latest report entitled ‘Recession and Shocks,’ it takes up to 16 months for employment in the hospitality and leisure industry to recover after an exogenous shock (figure 3, left frame). It may take even longer to recover this time due to social distancing; does it mean that restaurants will be forced to reduce the amount of tables for the first few months after the activity starts again? What about pubs?

Figure 3 (right frame) shows the performance of global food (retail & distribution) stocks relative to leisure stocks and clearly highlights the devastating effects of COVID-19 on certain industries or sectors. It indicates that investors will have to be very picky regarding the stocks they chose in the coming months as buying aggregate indexes will not be a profitable strategy as it has been in the past decade.

Historically, flat or falling growth combined with rising inflation has been the worst outcome for stocks (to the exception of few industries such as tobacco, food producers or healthcare). Therefore, we think that gold will perform well during that period and that the precious metal could trade at new all-time highs (in USD terms) in the coming months.

Figure 3

Source: Eikon Reuters, Variant Perception

Short-term outlook

Even though we are bullish on gold in the medium to long run as the ultimate hedge against rising money supply and equity selloffs, we expect the US dollar to appreciate against most of the currencies in the near term. Even though numerous drivers are pointing towards a lower greenback in the short run (higher reserves held at the Fed, recovery in cross currency basis swaps indicating less concerns on the global USD shortage narrative, lower US yields), we do think that the USD will outperform most of the DM and EM currencies as long as price volatility remains high.

Figure 4 shows that most of G10 currencies perform poorly when VIX is high (VIX > 20), to the exception of the two other ultimate safe havens: the Swiss franc and the Japanese yen. We also think that any bull bounce in markets could be seen as an opportunity to buy the yen against traditional crosses such as GBP, EUR or AUD.

Figure 4

Source: Eikon Reuters, RR Calculations

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in USD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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