Every week, it seems, there’s a different company facing a PR disaster. Most recently it was Boeing in the spotlight. CMC Markets’ Chris Smith explains what crises can mean for investors.
PR crises usually come out of the blue. Even what appear to be the best-run listed companies will find themselves dealing with a public relations disaster at some point.
That was certainly the case for Boeing, which was celebrating the successful launch of its new 737 Max aircraft when it all went horribly wrong – two planes crashed.
And last year, Facebook found itself in the firing line for leaking users’ data to political consultancy Cambridge Analytica.
Crises could stem from proposed changes to industry regulations, to product faults, or just a CEO’s ill-judged tweet. The causes are many and varied.
But almost universally, these events cause an immediate and drastic fall in share price as investor confidence plummets, as investors sell first and ask questions later.
Often scandals and crises are disclosed by the media, rather than the companies themselves. It’s only once all the facts come to light that it’s possible to say whether the reaction is warranted or not.
The potential for recovery (or not) from most such events can be very profitable for longer term investors but can be the path to bankruptcy for others.
Boeing 737 Max
The latest crisis for NYSE-listed Boeing was the two crashes involving their new 737 Max aircraft – which, combined, saw 346 passengers lose their lives. Both incidents appear to have been the result of a software bug.
Boeing, one of the world’s largest and most-trusted listed companies, saw US$60 billion wiped off its share value in one day, as investors reacted to news of the tragedy. It’s still struggling to recover as the investigation goes on.
Until this point, the company had been riding high, up over 200 per cent in the last three years, and with a strong order book of planes.
One of the most critical factors in calming investors’ nerves and regaining the trust of fund managers in the wake of a disaster, is the speed of response.
Boeing and the Federal Aviation Administration (FAA) tried to control the narrative in the media. First they labelled it a lone event, which affected just one plane among the incredible 800 units Boeing delivered to customers last year. Then things got worse with a second crash, in March.
Boeing has since focused on pilot training, software fixes and ensuring it investigates the course of events thoroughly with recertified fixes. As at May 2, the FAA had yet to approve the software update, and changes to the certification process and pilot testing are still under way.
Boeing faces billions in losses
The common view appears that Boeing will face billions in liabilities from passengers’ families, and airlines who have grounded their 737 Max fleets, plus the revenue impact of production cuts.
Since the second crash in March, more than 300 Boeing 737 Max planes have been grounded around the world. Production of the 737 Max has been cut by 20 per cent as airlines review their orders of one Boeing’s most popular planes.
When troubling headlines strike, investors and traders have to make quick decisions to sell, hold, buy, or avoid at all costs.
While the headlines look set to continue for a while yet, I believe Boeing will survive the dip in value. The strong barriers to entry to the airline industry, the sector’s continued expansion, especially in China, and the limited choices of quality aircraft producers, will work in its favour.
As Boeing chief executive Dennis Muilenburg said: “When the Max returns to the skies with the software changes to the MCAS function, it will be among the safest airplanes to fly.”
Facebook faces off
In March 2018, Facebook saw US$100 billion wiped off its company value. Shares plunged 25 per cent after news sources revealed that over 87 million Facebook users’ data had been leaked to the political consultancy Cambridge Analytica.
During the subsequent investigation, Facebook admitted it knew Cambridge Analytica had been siphoning off data through a program called This Is Your Digital Life and had not acted to protect user data.
Chief executive Mark Zuckerberg had several hearings with Congress and the European Union to explain the massive nature of the breach.
Despite this scandal, Facebook’s shares have recovered from those lows and now sit 18 per cent higher than just before the news broke – meaning those with the nerve to stick around enjoyed a very profitable trade.
Equifax data breach
Global credit risk assessment agency Equifax announced in September 2017 that it had fallen victim to a cyber-security breach four months before.
Around 145 million US consumers’ personal data including social security numbers were affected.
Its share price plunged 37 per cent, as investors fled. Again, this turned out to be an opportunity for longer term investors and the shares recovered up 30 per cent from the lows to trade near earlier levels.
The Volkswagen emissions scandal in 2015 cost the company US$2.8 billion in criminal fines, and saw shares drop more than 50 per cent.
This wasn’t its first major scandal, either. The car giant faced fraud and bribery allegations in 2005, which made huge headlines and led to investigations, resignations and convictions overlater years.
Shares were very slow to recover but never dropped lower than the initial reaction period, as investors gained back trust in the car manufacturer.
Do some companies never recover?
There are cases throughout corporate history of total business failure for companies, as a result of a scandal or criminal fraud. These include Enron, WorldCom, Barings Bank, and most recently, Lehman Brothers.
Taking advantage of a crisis
When calamity strikes, markets fear the worst and shares are punished accordingly.
Sometimes the window of opportunity for investors is very slim, to either sell your shares or buy into a selloff.
History has given us many examples of both good and bad leadership in the wake of these events – which companies sometimes take months to recover from, if they ever do recover.
It’s never easy to place investment capital behind negative headlines (and downgrades to future earnings). However, the media will eventually move on to the next story, and memory fades for both the public and investors.
Facebook is a prime example, posting record user numbers again following a period when some predicted the total collapse of its business model.
The great super-investor Warren Buffett has made some of his most profitable investments in times of crisis.
It always pays to remember the potential opportunity during events such as these – it’s about time in the markets, and the old adage that it’s better to buy low and sell high.
Published 29 May 2019
Disclaimer: Chris Smith does not hold shares in any names mentioned at time of writing. CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
This article does not contain any financial advice and has not taken into account any particular person’s circumstances. Before relying on it, we recommend you speak with a financial adviser. This story reflects the views of the contributor only. Content comes from sources that we consider are accurate, but we do not guarantee that the content is accurate.
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