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Why companies that have grown with the past can be good for the future

We look at 3 companies that have changed with the times and could thrive in the post-pandemic world.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

All information is correct as at 30 September 2021 unless otherwise stated.

Companies must change with the times to thrive.

We admire companies with a history of grasping the nettle. Such openness to change will be crucial in the rapidly changing post-pandemic world.

In this article, we take a closer look at three companies that have done just that.

All information is correct as at 30 September 2021, unless otherwise stated. This article isn’t personal advice or a recommendation to invest. All investments can fall as well as rise in value, so you could get back less than you invest. If you’re not sure an investment is right for you, seek advice.

Investing in individual companies isn’t right for everyone – it’s higher risk as your investment is dependent on the fate of that company. If a company fails, you risk losing your whole investment. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

Delta Airlines – not a conventional route to success

The US’s Delta is one of the world’s largest airlines, with a global network covering 50 countries and over 15,000 daily departures.

This aviation giant started life as a US crop-dusting operation in 1925, and then operated the first international mail and passenger route on the west coast of South America.

We like Delta’s exposure to domestic travel. In the US, domestic travel has returned to 2019 levels, while there are “signs of improvement” to business and international travel.

Delta Passenger Revenue By Region

Source: Delta second quarter 2021 results.

Domestic travel in the US is very competitive, which means Delta does face pricing pressure. This will probably be more acute over the near term. But it’s also well known for having a good business-travel proposition, compared to some rivals. This makes Delta stand out. It has a higher proportion of capacity at sought-after hubs compared to other carriers. That matters when you’re going after business travel.

Delta also has other sources of revenue. This includes a cargo and oil refinery business – only a smaller part of the overall story, but it’s a nice extra source of income.

We won’t sugar coat it, the pandemic was harsh. Revenue fell over 64% to $17.1bn in 2020. Because of the high proportion of fixed costs, pre-tax profits swung from $6.2bn to a $9.0bn loss.

The exact shape of recovery is very hard to predict. New Covid-19 variants, changing government advice, and even demand for long-haul travel could all mean Delta’s in for a bumpy ride over the medium-term.

Atlantic and Pacific travel is still 85% and 87% lower than pre-pandemic levels. Analysts expect revenue and profits to begin recovering in the next year or two, but if new restrictions come into force, that could make Delta’s debt position problematic.

Ultimately, we think Delta Airlines is one of the better placed names in its sector. Its domestic business focus is a real benefit in our opinion. Those strengths are reflected in a forward price to book ratio of 5.81.


Coats Group – bursting at the seams with opportunity?

Thread. A tiny but vital part of everything from clothes to plane upholstery and energy products.

The world’s largest industrial thread manufacturer, Coats, had revenue of $1.2bn in 2020. It sells its products in over 100 countries and has around 40,000 customers. The biggest money-maker is apparel and footwear, where sales of zips, trims and threads make up about 73% of group revenue.

While it’s always been in the business of thread, it’s hard to comprehend how far Coats has come. It started as a tiny business over 200 years ago selling 3-ply cotton sewing thread as a cheaper, more readily available alternative to silk. It changed the industry forever.

Fast forward to today and Coats is an integral part of global supply chains. That’s what we admire about the group. No matter what happens, industries will still need Coats’ products. A fashion retailer might get their designs wrong and miss out on sales – but they’ll still need material to make the next collection. The car industry might go through ups and downs, but new models are always being made, and seats need stitches.

It’s true that when Coats’ end-markets go through a difficult time, demand is dented. But some level of revenue is pretty much guaranteed. When one part of the portfolio struggles, another can, in theory, pick up some of the slack.

Coats pre-tax profit (£m)

Scroll across to see the full chart.

Past performance isn’t a guide to the future.

Source: Refinitiv Eikon, to 28/09/21. Years 2021 – 2023 are consensus estimates.

Net debt’s forecast is equivalent to around 0.8 times cash profits (EBITDA) at the last count. That financial strength helped the group feel comfortable enough to reinstate the dividend. The prospective yield for the next 12 months is 2.2% – but remember yields are variable and not guaranteed.

Sustainability is an area with potential. The group’s prioritising more eco-friendly products, which are increasingly in demand – especially in the apparel space. Getting a head start on this growing area is a great move in our view.

Exactly how post-pandemic demand shakes out remains a bit of a mystery – especially as regions are recovering at different rates. Half year results were held back by new lockdowns in India for example. But we think Coats is resilient and has long-term strengths not necessarily reflected in its price to earnings ratio of 13.5.


Marriott – time to check-out a hotel giant?

We’ve all heard of Marriott hotels. But you might not know the hotel conglomerate started off as a root beer stand in 1927. Although not quite on the same scale, Marriott’s undergone more big changes during the pandemic.

The first is a major cost-saving operation. Total operating costs dropped from $19.2bn in 2019 to $10.5bn in 2020. That includes a large number of redundancies. The group also shored up its balance sheet, with liquidity boosted by $920m thanks to changes in terms from lenders. These measures were drastic, but necessary. The swift action means Marriott has a stronger foundation from which to rebound.

Something that will help is its exposure to domestic travel. Revenue per available room in the US has rebounded far more quickly than expected. Being able to capture driving-holiday customers helps soften the impact of the still subdued international luxury and business travel.

The other thing we admire is Marriott’s franchise model. Of its 7,642 hotels, 72% are run by franchisees. That means Marriott’s not on the hook for day-to-day running costs. Lower fees from franchisees during Covid, are a temporary blip, rather than an indelible stain on the ledger.

We also think Marriott is well-poised for the return of business and luxury travel. The group owns over 30 brands, including the Ritz-Carlton and St Regis. We think there’ll always be demand for marbled lobbies and exclusive suites. Marriott is well-placed to capture this market, while less well-known options might have to peddle harder.

Recovery is essential because Marriott’s net debt forecast as a proportion of cash profits was more than double the industry average, at 9.3 times last year. We’re aware this is expected to fall at a decent pace, but any further disruption would hurt. The group could even ask investors to open their wallets.

Marriott Net Debt and Cash Profits ($bn)

Past performance isn’t a guide to the future.

Source: Refinitiv Eikon, to 18/10/21. Years 2021 -2023 are consensus estimates.

Marriott’s price to earnings ratio is a bit above the ten-year average at 32.9. That might look intimidating. However, we think the brand's market position and liquidity mean it could be worth attention.


Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments and income they produce can rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

The Switch Your Money On podcast from Hargreaves Lansdown

This podcast isn’t personal advice. If you’re not sure what’s right for you seek advice. Investment rise and fall in value, so investors could make a loss.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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