S&P Global Indices disclosed on April 1 that department store retail giant Macy’s (M, Financial) “will be removed from the S&P 500 effective prior to the open of trading on Monday, April 6.” The company will be moved to the S&P 600 SmallCap Index instead, and it will be replaced by Carrier Global Corp. (CARRW, Financial), an air conditioning company being spun off of United Technologies (UTX). According to S&P Global Indices, Macy’s no longer belongs on the S&P 500 because of its low market cap and low growth expectations.
During the first three months of 2020, shares of Macy’s fell 71% as the novel coronavirus (Covid-19) caused it to close all 775 of its brick-and-mortar locations. Earlier this week, the company announced that it would furlough the majority of its 125,000 employees as it moves “to the absolute minimum workforce needed to maintain basic operations."
On April 2, shares of the company traded around $4.45 for a market cap of $1.37 billion. In addition to the most recent declines, Macy’s has seen its share prices drop since 2015 due to waning investor enthusiasm as revenue stagnated.
In addition to the fall in market cap, Macy’s had its credit rating cut to junk by the S&P on Feb. 18, since “improvement trajectory” proved to be weaker than expected. The company has a cash-debt ratio of 0.1, a current ratio of 1.18 and an Altman Z-Score of 1.46, all of which will come under heavy pressure as sales grind to a near halt.
However, Macy’s isn’t the only S&P 500 component that has seen its market cap plunge below the $2 billion level amid business evaporation and financial weakness over the past quarter. It also isn’t the only company on the index that has been struggling in terms of share price and earnings for years. Below are three companies whose spots in the S&P 500 may be precarious.
Alliance Data Systems
Alliance Data Systems Corp. (ADS, Financial) is a provider of private label credit cards and loyalty and marketing services to businesses. Shares fell 70% during the first quarter of 2020, following a longer trend of share price declines and stagnant revenue.
On April 2, shares of Alliance traded around $27.34 for a market cap of $1.3 billion. The cash-debt ratio of 0.37 is average for the industry, and the current ratio of 2.03 indicates short-term stability. However, the Altman Z-Score of 1.24 indicates that the company is at risk of going bankrupt over the next two years.
Compared to Macy’s, whose market seems to be drying up as more consumers shop online, Alliance is more of a pick-and-shovel play on the broader physical and online retail sectors. Though its shares are down, its earnings are likely safer since the company earns its revenue through a combination of credit cards, data capture and marketing.
Going by the company’s earnings per share of $11.25 for full fiscal 2019 and assuming a fair price-earnings ratio of 15, shares would trade at around $168 apiece for a market cap of $8.03 billion. Alliance’s history of being undervalued by shareholders may make it less likely to be booted off the index, but that might change if it doesn’t deliver on earnings.
Apache
As an oil and gas exploration company, Apache Corp. (APA, Financial) has experienced a double blow from the oil price war between Russia and Saudi Arabia and the economic downturn from Covid-19 shutdowns. Shares fell 83% during the first quarter of 2019 following a decade-long decline in both revenue and share price.
On April 2, Apache shares traded around $4.69 for a market cap of $1.77 billion. With a cash-debt ratio of 0.03 and an Altman Z-Score of -0.49, the company is at the bottom of the barrel even compared to the rest of the heavily indebted U.S. oil sector.
While global oil demand is expected to rise over time, its growth has slowed down significantly from the explosive levels of the early 2000s. Intense competition for market share between the U.S., OPEC and Russia have resulted in an oversupply, driving prices down and threatening to squeeze out the smaller, weaker players in this space. Thus, Apache seems like it could be a likely candidate for leaving the S&P 500.
"We have taken aggressive actions to protect our balance sheet and cash flows: decreased planned 2020 upstream capital investment by approximately $1.3 billion, or 54% year over year, reduced our annual dividend by $340 million, and targeted more than $150 million of annualized cost structure reductions through organizational changes we began in late 2019,” Chief Financial Officer Stephan Riney said in a statement, indicating that the company expects a significant period of financial struggles and lack of profitability.
Capri Holdings
Capri Holdings Ltd. (CPRI, Financial) is a global luxury fashion group that owns the brands Versace, Michael Kors and Jimmy Choo. Shares of the company fell 71% during the first quarter of 2020. Though the company has seen its stock decline after peaking in early 2014, revenue growth has been strong, though this may be expected of luxury brands during a strong bull market. In a bear market, the company is likely to see its earnings drop as consumers spend less on luxury items.
On April 2, shares of Capri Holdings traded around $8.13 for a market cap of $1.21 billion. Its cash-debt ratio of 0.06 is lower than 85.99% of competitors, and the current ratio of 0.77 also indicates short-term financial instability. Given its rapidly increasing debt and the potential of having to borrow more if sales decrease, the company might face issues financially.
As an owner of luxury brands, Capri Holdings has a higher addressable market compared to Macy’s, though whether it can tap that market depends on the strength of its brand names. Thus, it may be less likely in comparison to be booted off the S&P 500. However, the company’s credit rating was recently cut to junk by Fitch as the rating agency expects sales to plummet and borrowing to increase. If S&P Global Indices wants to add a large-cap, non-retail company to the index, Capri Holdings may be a candidate to give up its spot.
“Fitch has assumed a scenario where discretionary retailers in the U.S. are essentially closed through mid-May, with sales expected to be down 80% to 90% despite some sales shifting online, with a slow rate of improvement expected through the summer," said a Fitch representative about the wave of credit downgrades following Covid-19 shutdowns.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research or consult registered investment advisors before taking action in the stock market.
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