For some, it might still be a bizarre concept that the government can grind to a halt. However, the event, or at least discussion about the event, have become almost common occurrence. Whether because of changes to the debt ceiling, which needs to be routinely raised in order for the government to continue to run their budget, or because the parties do not agree on individual aspects of the budget, the threat of a shutdown is here to stay.
The risk is not something intangible either, the shutdown in 2013, which lasted 16 days, has been estimated to have cost the U.S. economy around $24 billion and has materially impacted the GDP numbers in the respective quarter.
Due to this, it should be of importance to analysts to understand the possible implications of such events on the public companies and / or the broader market.
The AlphaSense platform allows you to perform such research in an efficient manner due to the vast depth of the information present on the platform, as well as brilliant search capabilities that allow accessing that information in seconds.
What Government Shutdown?
If we start more broadly, it would seem that investors are largely unfazed by the developments. The VIX barely “budged” as the shutdown risk increased in the week before, and the S&P 500 continued to race higher even during the shutdown.
This would seem to agree with the conclusion of an article featured in the FT which pointed out that in a long-term view, past shutdowns did not derail the economy on their own. Furthermore, the markets have had similarly muted response even during the 1980s under Reagan and the 1970s under Carter.
However, the AlphaSense trend chart shows us that individual companies certainly talk about the government shutdown more often after 2013 and on a more consistent basis. Thus, further investigation is warranted.
Finally, in my mind, the ability of the platform to give analysts a quick and reliable view of the amount and strength of the references is one the strongest benefits of AlphaSense. It allows to efficiently test any “top-down” thesis and back it up with solid data points.
Impact on Individual Companies
Prior to the shutdown in 2013, companies rarely mentioned it. Several companies featured the event as a risk factor. One example is Booz Allen Hamilton ($BAH), a prominent contractor to the U.S. government, which mentioned the shutdown in 1996 in the disclosure. These companies also mentioned the 2011 period that saw an intense debate about the debt-ceiling. However, they have not offered much in the way of specific details.
Then came 2013, and the shutdown that forced companies to disclose more. It also exposed companies that could be materially impacted.
Specific examples, such as an IT contractor, Alion Science & Technology, now a private company, that saw its revenue decrease by over 10% in a single quarter because of the shutdown. They also mentioned that due to the ongoing inability of Washington to agree on a budget, they felt the effect of budget sequestration. Violion Memory, another IT contractor, also no longer public, was materially impacted too. The shutdown contributed to the overall downfall of the company.
Identiv ($INVE), yet another IT contractor, also saw part of its revenue stream decline by as much as 39% in the quarter.
However, not just IT contracts were impacted. As you can see via AlphaSense’s industry filter applied to the references which allow analysts to either focus on their respective sector or to get a feel of the exposure of individual sectors to the event.
Financial companies voiced their fear about the shutdown as the potential catalyst for further macro challenges. The healthcare sector mentioned similar concerns with a special focus on the funding and approval process of their products.
Industrials were more directly impacted. For example, URS Corp., now part of AECOM ($ACM), had almost 3,000 employees furloughed as a result of the shutdown. They also voiced their concern about future budgets and the aforementioned sequestration.
After the 2013 shutdown, the impacted companies began to mention a risk of reoccurrence of a shutdown in all their filings across the spectrum. The most frequent concern was not the actual shutdown, but rather the inability to decide on the spending budget.
NetApp ($NTAP), an IT company that provides data systems to the U.S. government, said that ongoing uncertainty has dampened demand, and this revenue stream remained suppressed even in 2016. It is worth pointing out that since 2011, the U.S. government was not able to enact any spending bills on time.
At the time of the writing, a majority of companies have yet to voice their analysis of the shutdown, but there are initial signs. While most of the references from January are mainly connected to “obligatory” risk factors, in a transcript from a JPMorgan Conference, DaVita Inc ($DVA), a healthcare company, mentioned that they expect the relevant bills (connected to PATIENT Act) will be passed, despite the current uncertainty.
Mercury Systems ($MRCY), a defence contractor, also voiced optimistic remarks connected to the defence spending during the Q2 conference call transcript. However, they did point out that the situation remains challenging.
It seems that the impact of a government shutdown might be more limited on the macro level, but delays connected to funding are an important matter for several public companies. This is especially true in the case of IT contractors connected to the government that saw material revenue decrease as an effect of the shutdown in 2013. Industrials and Healthcare companies could also be impacted due to delays in approving of individual spending bills.
Why is all this relevant when the January shutdown lasted “only” three days? Because the U.S. government might not see an improvement anytime soon. The next series of deadlines is just around the corner. One could also ponder over the overall debt level of the country, which stands at $20 trillion and thus spending is unlikely to leave the debate either.
Finally, because of the research I conducted, I am now able to set up various search alerts that will allow me to stay on top of the developments and be able to quickly react should any individual company be impacted.
Jan Svenda is an independent equity analyst focused on the U.S. OTC market. He runs a newsletter focused on creating a database of credible companies that trade in the space and exhibit an investment opportunity.
1. Washington Post Analysis 2013
2. FT Analysis 2018
3. Wikipedia ‘United States debt-ceiling crisis of 2011’ entry
4. Wikipedia ‘Budget sequestration’ entry
5. Wikipedia ‘Alion Science & Technology’ entry
6. Washington Post Analysis 2018
7. Washington Post Analysis 2018