Market trends

Analyzing impact of the 2019 government shutdown

Jan Svenda

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March 2, 2019


Capitol building.
Capitol building.

Another year, another government shutdown.

We recently got out of the “record-breaking” shutdown that lasted 35 days. According to the Congressional Budget Office, just the direct costs to the U.S. economy are about $11 billion. Given that the 2013 shutdown (lasting 16 days) cost the U.S. economy about $24 billion, we can expect a sizeable indirect cost impact.

A look at mentions of “government shutdown” and “forecast” reveals an emerging trend.

Given the size of the U.S. economy, the overall macro impact of this shutdown might be generally limited. But investors should be wary of how companies will be impacted, how they’re reacting to the current situation, and if there are general trends that might affect the economy.

This is where AlphaSense comes in handy. It allows you to identify companies and industries that are the most vulnerable quickly. In addition, one can also easily segment the results according to the mentioned source.

This is crucial. Many company mentions are tied to necessary regulatory disclosures that won’t always show the precise impact of the shutdown. In this article, I will only use words from transcripts where the management gives their take on the situation.

A closer look at the 2019 Government shutdown

Looking at the spikes in mentions this earnings season, the number will likely eventually surpass the 2013 mentions as the trend is not decreasing.

Government shutdown by sector

You can quickly identify which sector talked about the shutdown the most through the search.

The commercial and investment banks were asked about the shutdown the most. However, they usually said the impact on their business is not overly material. They also added that while the uncertainty in the markets is far from ideal, they are not expecting a prolonged negative effect.

One notable exception was investment companies focused on mortgages which mentioned that the spreads on agency mortgage-backed securities have widened, which impacted their results.

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While the IT sector was only second in mentions, the impact was more visible. For example, Booz Allen Hamilton noted revenue impact as their core contracting business is tied to the government. Flir Systems also mentioned revenue impacts connected to delays in obtaining licenses. This then slowed down the whole supply chain.

Industrials also noted the impact on revenue and delays. Here, the airlines mainly generated a portion of the business from functioning government. Delta Air Lines pointed out a $25 million revenue impact per month. They also mentioned the start of their new Airbus A220 was significantly delayed as the shutdown impacted FAA. (AlphaSense users can view the search here).

However, the shutdown’s most critical impact was visible in the healthcare sector. Specifically in the case of DaVita, which is trying to close a $4.3 billion deal with UnitedHealth Group for a large part of DaVita’s business. The deal’s closing was significantly prolonged and pushed the management’s expectations past their original estimate in the wake of the shutdown. (AlphaSense users can view the search here).

Conclusion

As you can see, the reactions to the shutdown varied. Companies were probably not as stressed as in 2013 because the shutdown occurred over funding for national security and not over individual items on the broader U.S. budget. The revenue impacts and delays were there, but companies hope the remainder of 2019 should not pose a significant challenge.

That is if there is not going to be another shutdown.

Jan Svenda is an independent equity analyst focused on the U.S. Small/Micro-cap space. He searches for long ideas trading around Net Current Assets Value (NCAV) and for sharp pictures which showcase a significant potential for aggressive or manipulative accounting. 

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Jan Svenda

Jan Svenda is an independent equity analyst focused on the U.S. Small/Micro-cap space. He searches for long ideas trading around Net Current Assets Value (NCAV) and for short ideas which showcase a significant potential for aggressive or manipulative accounting.


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