There are those that failed to see it coming or adapt fast enough. The poster child of the old world is General Electric. Three CEOs in three years reflects the magnitude of the structural challenges GE is facing. They were all quality CEOs with great track records but the pace of disruption was too fast for them to handle.
GE is bricks and mortar, factories and machinery, massive sales forces and all the things you don’t want in today’s fast-changing environment with physical overcapacity and what we call demand destruction in their underlying businesses. And GE is saddled with massive amounts of debt.
They didn’t foresee renewable energy so quickly reducing (disrupting) demand for gas-powered turbines. Following the collapse in earnings in their gas turbine business GE is now heavily reliant on the aviation industry for its earnings, with GE Aviation being its largest profit centre.
With the airline industry being decimated as a result of the crisis, this is not only going to hit GE’s industrial cash flow generation hard but it’s also going to hit GE Capital as well.
GECAS, its aircraft leasing business, is the main profit generator at GE Capital and by far its most valuable business.
It looks like a great business when aviation is soaring and airlines need planes, but when the market turns sour leasing companies are severely exposed. The severe shock of COVID-19 on airlines means the downside can only be worse (defaults and future sales).
One leader rapidly shifting its business model from the physical world to the digital has been Domino’s Pizza Inc, listed on the NYSE. They pioneered fast home delivery.
Domino’s have built a two-story, 33,000-square-foot facility, next to its headquarters on the Domino’s Farm campus in Ann Arbor, Michigan. It houses multifunction teams working on new technologies (voice automation, autonomous delivery, GPS driver tracking) and other strategies the company hopes will quickly find their way into more locations.
The pandemic increased growth rates in the business with comps for the U.S. business improving from +7.1% for the 4 weeks ended April 19, to +20.9% for the 4 weeks ended May 17. These impressive growth numbers are in the middle of the second worst decline in global GDP.
As we move into a more restrictive social environment with perhaps social distancing becoming the norm, Domino’s will disproportionately benefit. In contrast smaller local competitors will struggle even more to survive, thus handing Domino’s even more sales.
Learn more about why Insync’s stocks are so financially strong: https://www.insyncfm.com.au/post/insync-may-2020-fund-commentary