Random Thoughts: Peak Hysteria, Viral Impacts, TZOO Update

Peak Hysteria

If we haven't reached peak hysteria yet, we might be getting close.

This recent NY Times article reads like a dystopian sci-fi short story published in a weekly tabloid. Emphasis added:

...fear of the virus reconfigures the very concept of public space...
 
People may be less inclined to jam into crowded restaurants and concert halls even after the virus is contained
 
...risk triggering a financial crisis of cataclysmic proportions
 
But even after the virus is tamed - and no one really knows when that will be - the world that emerges is likely to be choked with trouble...
 
Some social distancing measures could remain indefinitely
 
...certain behavior patterns are going to change, if not forever at least for a long while
 
...every inhabited part of the globe is now in trouble

Yes, things are very bad and probably going to get worse. Potentially much worse. But this almost certainly isn't the end of human civilization, public space and social contact as we know it.

Viral Impacts

Updated Timeline

I wrote some thoughts about the recovery from COVID-19 a few weeks ago, but it looks like my estimates for the "beginning" of a "return to normal" (2-4 weeks) were far too optimistic.

The Federal Government has extended its "slow the spread" guidelines by another 15 days, and additional states have enacted stay-at-home orders. This means that things will be shut down until May at the earliest. Rather than try to make another prediction that will prove incorrect, I'll leave it to someone who is much more knowledgeable about public health: Bill Gates.

Gates recently participated in a Q&A session where he said that "if a country does a good job with testing and 'shut down' then within 6-10 weeks they should see very few cases and be able to open back up." He also seems optimistic that if testing is done right, "the rebounds should be fairly small in numbers" - even after restrictions are lifted.

His assessment, and the White House's own predictions, seem like they might be based on the models here. These models indicate a peak in the US by mid-April, and cases mostly settling down by early June. Since most states started isolation measures a week or two ago, an early June "re-opening" also seems to line up with Gate's 6-10 week timeline and Trump's assertion (which, no matter your political leanings, should be viewed with extreme skepticism) that "great things will be happening" by June.

It's important to note that Gate's comments are qualified by "if a country does a good job with testing and 'shut down'"; it's pretty clear that the US is failing on both counts. It should also be noted that the models being referenced are "inherently optimistic."

Early June is probably a "best case" scenario.

Valuation Impacts

I've recently attempted to quantify the impact of COVID-19 on my valuations, with a new worksheet that you can find here:

[PUBLIC 2020.04.03] COVID-19 Worksheet
Sheet1 Baseline, Obligations <=12 mo,COVID-19 Impact,Liquidity,Survival,Valuation Impact Revenue,Total Expenses,Payroll,Interest,Principal,Other,Revenue Hit,Payroll Savings,Other Savings,Monthly Burn,Cash,Addl Liquidity,Months of Cash,COVID Duration (Mo),Total COVID Burn,Post-COVID Revenue Hit,...

There are two key questions I am trying to answer:

  1. Will the company survive? I try to calculate how many months of cash each company has, based on prior year "fixed" expenses, projected revenue declines, potential cost cutting measures, and sources of liquidity.
  2. What is the impact to operating income? 2020 is not going to be a normal year. I try to calculate what the impact will be to operating income, also based on the assumptions listed above.

These are obviously super rough calculations based on highly uncertain assumptions - but it gives me a ballpark estimate of the relative risk that each company faces, and how things might evolve.

In a crisis, it's easy to operate based on emotion, fear, and the daily ups and downs of news headlines. But even if you fear that "things will get much worse", you can still attempt to quantify that outcome, and value companies accordingly. Many companies appear significantly undervalued even if you assume a "financial crisis of cataclysmic proportions", a world "choked with trouble", and the metaphysical re-configuring of "the very concept of public space."

Update: Apr 3, 2020 14:02 HST - Delta Airlines (DAL) just issued a release saying that they are burning through 60MM of cash per day. Just for fun, I plugged DAL's numbers into my model above and it predicted ~$63MM / day. At the risk of sounding too self-congratulatory - not bad!

TZOO Updates

I only recently wrote about Travelzoo (TZOO), but, as with the virus, things are fast-changing.

  • One key margin of safety in my mind was that the owners would backstop any liquidity concerns. But given the continued "involuntary selling", and the near-term volatility of stock price movements likely adding additional stress on collateral, this may not be realistic
  • On the other hand, the continued loss of control by the founders may make TZOO a more compelling acquisition target for a private equity firm
  • The biggest liquidity crunch is probably going to come from $11MM due for the acquisition of Jack's Flight Club (JFC) by April 30, 2020.
  • On the other hand, if you are the owners of JFC, and the travel industry has been crushed, you probably aren't going to walk away from the deal (because your valuation has also been crushed), or force TZOO to go bankrupt (because they are still your best chance to realize maximum value). A possible outcome is that they simply agree to extend the deadline for the promissory note.

TZOO is probably still massively undervalued, but there is a lot more uncertainty in the situation than I originally anticipated. It's clear that TZOO has a great business - but they have to survive the next few months first, and the investment outcome will likely be a binary one.

Disclosure: I am long TZOO

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