Weak profits can foreshadow distress or bankruptcy: 10 industries at risk for restructuring

August 28, 2018


By Steve Fleming, US Crisis and Restructuring Leader, PwC Deals

The US economy continues to hum along, but that doesn’t mean companies in every sector are on solid footing. In the latest report for PwC’s Board’s Guide to Deals series, we focused on how boards of directors need to work with management to help ensure their companies are well-positioned for the future and not at risk of falling into distress that could lead to restructuring. Financial distress could strike any industry, and vulnerabilities usually increase when the economy is in a downturn, which some economists and others fear could happen in 2019 or 2020.

To help determine which industries could be at risk of distress in the near future, PwC recently analyzed financial data from roughly 2,000 US companies across 62 industries. We first did this analysis in 2017 as part of Dodging the bankruptcy bullet, our guidance on how companies can proactively assess their finances and operations to help avoid a crisis and drastic reorganization.

One sign of potential distress in companies is slowing profit growth. Our analysis calculated the value of expected future profit growth as a percentage of a company’s enterprise value. The enterprise value of a company is the value of its operations — what it would cost to buy those operations outright. It’s essentially the company’s market value of equity plus debt, minus cash.

If no profit growth was anticipated, enterprise value would equal the value of assets plus the present value of current profits projected into the future. But there usually is a gap between enterprise value and the sum of these two items, which is attributed to expected future profit growth. Given that, future profit growth is the present value of profit growth investors expect throughout the future.

From our latest analysis, the chart below shows five US industries that are among those facing the most profit pressure. Within each industry, companies represented on the left face more profit pressure while those on the right face less.

In addition to the above, there’s potential for restructuring at companies in five other industries, some of which we discussed in PwC’s Bankruptcy and Restructuring 2018 Outlook:

  • Retail: As retailers struggled with high debt and lost market share to online shopping, 2017 saw the most bankruptcy filings of more than $25 million in liabilities since the Great Recession. Shifting consumer buying trends and declining mall traffic likely will continue to challenge retail companies in the coming years.
  • Oil and gas: Crude oil prices have rebounded over the past two years but remain well below the highs of earlier this decade. While there may not be as many bankruptcy filings as in recent years, we still could see other restructuring activity, particularly among gas-focused producers.
  • Coal: The current presidential administration has moved to relax regulations, but the coal industry still faces stiff competition within the broader energy space. Most countries have committed to lowering emission levels and explored alternative energy sources, and a significant drop in demand has affected all major US coal producers.
  • Shipping: The increase in tariffs by the US and other nations and growing potential for trade wars bring uncertainty to shipping companies. The industry has seen recent consolidation, and market volatility combined with geopolitical tensions could drive other changes at companies.
  • For-profit education: Some federal regulations have been rolled back, but for-profit colleges and universities continue to face heavy scrutiny. Concerns about student outcomes and default rates for student loans could test some institutions and their growth potential.

Given the headwinds in these 10 industries, management and boards of directors should be proactive about reassessing key financial and operational areas. Whether it’s adjusting debt obligations, consolidating divisions, selling a business or some other move, taking action early could head off distress and help reduce the potential for bankruptcy or some other form of restructuring in the future.

For more insight, please read the full piece, How can boards help their companies navigate distress – before it’s too late?


Related Links

Contacts

Bob Saada

US Deals Leader Tel: +1 (646) 471-7219 Email: bob.d.saada@pwc.com

Curt Moldenhauer

US Deals Solutions Leader Tel: +1 (408) 817 5726 Email: curt.moldenhauer@pwc.com