Part 1: Are 25% of S&P Companies at a High Risk of Bankruptcy?
By Charlie Strout, CFA Professor Edward Altman recently warned of an impending spate of “mega” bankruptcies that will break all the records.[[1]](#ftn1) As the…
By Charlie Strout, CFA Professor Edward Altman recently warned of an impending spate of “mega” bankruptcies that will break all the records.[1] As the author of the well-known bankruptcy-predicting Z-Score, Altman knows a thing or two about financial distress, and he doesn’t like what he is seeing. Investors perk up when people start talking about bankruptcy—especially of big companies. Names like Enron and Lehman Brothers spring to mind and remind us the real damage mega-firm failures cause and some truly mammoth companies have that gone bust when the economy goes into a tailspin. If Professor Altman is ringing the alarm, it is worth it to see what his Z-Score is telling him. The Z-Score The Z-Score has been around since 1968. There have been a variety of other methods developed since it was first published that seek to improve on its predictive results (Campbell, Hilscher, Szilagyi (CHS) Model, the Ohlson O-Score, and Merton’s Distance to Default) . Altman himself developed Zeta Analysis back in 1977. However, despite these new methodologies—and more than a few analysts urging that we adopt them—the Z-Score is still widely used as an indicator of financial distress. The original 5-parameter Z-Score was developed specifically for manufacturing companies. Later, a 4-parameter score was developed for non-manufacturing and emerging-markets companies. Each has a slightly different scale as follows:
Z-Score Scale
High Risk
Grey Area
Low Risk
Manufacturing
< 1.81
Between 2.99 and 1.81
> 2.99
Non-Manufacturing
< 1.1
Between 2.6 and 1.1
> 2.6
Z-Score Parameters [2]
Parameter
Description
X1
working capital / total assets
Measures liquid assets in relation to the size of the company.
X2
retained earnings / total assets
Measures profitability
X3
earnings before interest and taxes / total assets
Measures operating efficiency
X4
market value of equity / book value of total liabilities (manufacturing) OR book value of equity / total liabilities (non-manufacturing)
Adds market dimension (in manufacturing model)
X5
sales / total assets (manufacturing model only)
Standard measure for total asset turnover
It is important to note that the data from the Z-Score is based mostly on companies’ SEC filings. At the time of writing, most companies had only reported on Q1 2020. This means that much of the really bad news may not be reflected in this analysis. It will likely get worse, much worse. We will be releasing Part 2 of this analysis in August with the Q2 financial results. That should be interesting... Methodology For this analysis, I grabbed the list of S&P 500 tickers and divided it into three groups. First, I removed all the companies where the Z-Score didn’t return a value when applied to my data set. (Most of the companies were financial firms where the Z-Score isn’t appropriate.) Then, I put all the companies listed in the manufacturing sector into the manufacturing group (164 firms) and all the remaining 276 firms into the non-manufacturing group. I ran the appropriate Z-Score against each of these groups. Granted, this is a bit “best-effort.” To really know which Z-Score is appropriate for an individual firm you would need to dive in deeper. However, I am comfortable that this is a reasonable approach for a first pass. Data Manufacturing Companies Distribution of Results for S&P 500 Manufacturing Companies__The 25 S&P 500 Manufacturing Companies with the Highest-Risk Z-Score
Rank
Ticker
Company
Industry
Z-Score
Risk
Ended
1
COTY
COTY INC.
Consumer Goods
(0.29)
High
2020-03-31
2
NWL
NEWELL BRANDS INC.
Consumer Goods
0.37
High
2020-03-31
3
KHC
KRAFT HEINZ CO
Food, Beverage & Tobacco
0.83
High
2020-03-28
4
F
FORD MOTOR CO
Automotive
0.84
High
2020-03-31
5
GM
GENERAL MOTORS CO
Automotive
0.90
High
2020-03-31
6
TAP
MOLSON COORS BEVERAGE CO
Food, Beverage & Tobacco
1.02
High
2020-03-31
7
MYL
MYLAN N.V.
Healthcare Products
1.08
High
2020-03-31
8
IR
INGERSOLL RAND INC.
Industrial Goods
1.10
High
2020-03-31
9
TPR
TAPESTRY, INC.
Consumer Goods
1.16
High
2020-03-28
10
PRGO
PERRIGO CO PLC
Healthcare Products
1.28
High
2020-03-28
11
PVH
PVH CORP. /DE/
Consumer Goods
1.29
High
2020-05-03
12
BA
BOEING CO
Industrial Goods
1.36
High
2020-03-31
13
TDG
TRANSDIGM GROUP INC
Industrial Goods
1.38
High
2020-03-28
14
IP
INTERNATIONAL PAPER CO /NEW/
Consumer Goods
1.47
High
2020-03-31
15
JCI
JOHNSON CONTROLS INTERNATIONAL PLC
Industrial Goods
1.58
High
2020-03-31
16
JNPR
JUNIPER NETWORKS INC
Technology Hardware
1.59
High
2020-03-31
17
WDC
WESTERN DIGITAL CORP
Technology Hardware
1.61
High
2020-04-03
18
IQV
IQVIA HOLDINGS INC.
Healthcare Products
1.71
High
2020-06-30
19
WAB
WESTINGHOUSE AIR BRAKE TECHNOLOGIES CORP
Industrial Goods
1.72
High
2020-03-31
20
CAG
CONAGRA BRANDS INC.
Food, Beverage & Tobacco
1.78
High
2020-05-31
21
SJM
J M SMUCKER CO
Food, Beverage & Tobacco
1.79
High
2020-04-30
22
BMY
BRISTOL MYERS SQUIBB CO
Healthcare Products
1.83
Medium
2020-03-31
23
AVGO
BROADCOM INC.
Technology Hardware
1.87
Medium
2020-05-03
24
MCHP
MICROCHIP TECHNOLOGY INC
Technology Hardware
2.04
Medium
2020-03-31
25
NTAP
NETAPP, INC.
Technology Hardware
2.05
Medium
2020-04-24
The 25 S&P 500 Manufacturing Companies with the Lowest-Risk Z-Score
Rank
Ticker
Company
Industry
Z-Score
Risk
Ended
1
ABMD
ABIOMED INC
Healthcare Products
55.89
Low
2020-03-31
2
ISRG
INTUITIVE SURGICAL INC
Healthcare Products
38.03
Low
2020-06-30
3
MNST
MONSTER BEVERAGE CORP
Food, Beverage & Tobacco
27.75
Low
2020-03-31
4
IPGP
IPG PHOTONICS CORP
Technology Hardware
19.96
Low
2020-03-31
5
VRTX
VERTEX PHARMACEUTICALS INC / MA
Healthcare Products
19.59
Low
2020-03-31
6
AMD
ADVANCED MICRO DEVICES INC
Technology Hardware
18.53
Low
2020-03-28
7
SWKS
SKYWORKS SOLUTIONS, INC.
Technology Hardware
18.05
Low
2020-06-26
8
NVDA
NVIDIA CORP
Technology Hardware
17.85
Low
2020-04-26
9
WST
WEST PHARMACEUTICAL SERVICES INC
Healthcare Products
17.78
Low
2020-06-30
10
DXCM
DEXCOM INC
Healthcare Products
17.07
Low
2020-03-31
11
INCY
INCYTE CORP
Healthcare Products
15.71
Low
2020-03-31
12
ILMN
ILLUMINA, INC.
Healthcare Products
15.21
Low
2020-03-29
13
ALGN
ALIGN TECHNOLOGY INC
Healthcare Products
14.67
Low
2020-03-31
14
IDXX
IDEXX LABORATORIES INC /DE
Healthcare Products
13.98
Low
2020-03-31
15
REGN
REGENERON PHARMACEUTICALS, INC.
Healthcare Products
13.85
Low
2020-03-31
16
TXN
TEXAS INSTRUMENTS INC
Technology Hardware
12.96
Low
2020-06-30
17
GRMN
GARMIN LTD
Technology Hardware
12.31
Low
2020-03-28
18
HRL
HORMEL FOODS CORP /DE/
Food, Beverage & Tobacco
10.15
Low
2020-04-26
19
MTD
METTLER TOLEDO INTERNATIONAL INC/
Technology Hardware
9.17
Low
2020-03-31
20
XLNX
XILINX INC
Technology Hardware
8.65
Low
2020-03-28
21
WAT
WATERS CORP /DE/
Technology Hardware
8.32
Low
2020-03-28
22
MXIM
MAXIM INTEGRATED PRODUCTS INC
Technology Hardware
8.26
Low
2020-03-28
23
ITW
ILLINOIS TOOL WORKS INC
Industrial Goods
7.27
Low
2020-03-31
24
EW
EDWARDS LIFESCIENCES CORP
Healthcare Products
7.25
Low
2020-03-31
25
SNPS
SYNOPSYS INC
Technology Hardware
7.19
Low
2020-04-30
Non-Manufacturing Companies In the sample, the Z-Score rated the a full 35% (91 of 276) of non-manufacturing companies to high risk. Fewer than half were rated low risk. Distribution of Results for S&P 500 Manufacturing Companies__The 25 S&P 500 Non-Manufacturing Companies with the Highest-Risk Z-Score
Rank
Ticker
Company
Sector
Industry
Z-Score
Risk
Quarter Ending
1
VRSN
VERISIGN INC/CA
Services
Technology Services
(25.24)
High
2020-06-30
2
APA
APACHE CORP
Resources
Energy
(6.14)
High
2020-03-31
3
CXO
CONCHO RESOURCES INC
Resources
Energy
(5.53)
High
2020-03-31
4
DPZ
DOMINOS PIZZA INC
Services
Hospitality
(2.76)
High
2020-06-14
5
EXR
EXTRA SPACE STORAGE INC.
Financial
REITs
(2.69)
High
2020-03-31
6
VTR
VENTAS, INC.
Financial
REITs
(2.48)
High
2020-03-31
7
SBAC
SBA COMMUNICATIONS CORP
Financial
REITs
(2.41)
High
2020-03-31
8
YUM
YUM BRANDS INC
Services
Hospitality
(2.31)
High
2020-03-31
9
NBL
NOBLE ENERGY INC
Resources
Energy
(2.21)
High
2020-03-31
10
NOV
NATIONAL OILWELL VARCO INC
Resources
Energy
(2.14)
High
2020-03-31
11
BKR
BAKER HUGHES CO
Resources
Energy
(1.90)
High
2020-06-30
12
ADSK
AUTODESK, INC.
Services
Technology Services
(1.53)
High
2020-04-30
13
DXC
DXC TECHNOLOGY CO
Services
Business Services
(1.41)
High
2020-03-31
14
O
REALTY INCOME CORP
Financial
REITs
(1.23)
High
2020-03-31
15
LB
L BRANDS, INC.
Trade
Retail
(1.09)
High
2020-05-02
16
SLB
SCHLUMBERGER LIMITED/NV
Resources
Energy
(0.96)
High
2020-03-31
17
AAL
AMERICAN AIRLINES GROUP INC.
Services
Transportation
(0.95)
High
2020-06-30
18
SBUX
STARBUCKS CORP
Services
Hospitality
(0.78)
High
2020-03-29
19
NLOK
NORTONLIFELOCK INC.
Services
Technology Services
(0.71)
High
2020-04-03
20
EXPE
EXPEDIA GROUP, INC.
Services
Technology Services
(0.56)
High
2020-03-31
21
NLSN
NIELSEN HOLDINGS PLC
Services
Business Services
(0.42)
High
2020-03-31
22
CAH
CARDINAL HEALTH INC
Trade
Wholesale
(0.39)
High
2020-03-31
23
HLT
HILTON WORLDWIDE HOLDINGS INC.
Services
Hospitality
(0.34)
High
2020-03-31
24
AIV
APARTMENT INVESTMENT & MANAGEMENT CO
Financial
REITs
(0.29)
High
2020-03-31
25
CCI
CROWN CASTLE INTERNATIONAL CORP
Financial
REITs
(0.25)
High
2020-03-31
The 25 S&P 500 Non-Manufacturing Companies with the Lowest-Risk Z-Score
Rank
Ticker
Company
Sector
Industry
Z-Score
Risk
Quarter Ending
1
NVR
NVR INC
Services
Construction
12.77
Low
2020-03-31
2
MKTX
MARKETAXESS HOLDINGS INC
Financial
Financial Services
12.32
Low
2020-06-30
3
TROW
PRICE T ROWE GROUP INC
Financial
Financial Services
10.30
Low
2020-03-31
4
FAST
FASTENAL CO
Trade
Wholesale
9.44
Low
2020-06-30
5
ANET
ARISTA NETWORKS, INC.
Services
Technology Services
9.35
Low
2020-03-31
6
INTU
INTUIT INC
Services
Technology Services
9.22
Low
2020-04-30
7
FB
FACEBOOK INC
Services
Technology Services
8.57
Low
2020-03-31
8
GWW
W.W. GRAINGER, INC.
Trade
Wholesale
8.36
Low
2020-06-30
9
GOOGL
ALPHABET INC.
Services
Technology Services
8.28
Low
2020-03-31
10
BEN
FRANKLIN RESOURCES INC
Financial
Financial Services
8.10
Low
2020-03-31
11
BKNG
BOOKING HOLDINGS INC.
Services
Technology Services
7.93
Low
2020-03-31
12
MA
MASTERCARD INC
Financial
Financial Services
7.90
Low
2020-03-31
13
ODFL
OLD DOMINION FREIGHT LINE, INC.
Services
Transportation
7.80
Low
2020-03-31
14
EXPD
EXPEDITORS INTERNATIONAL OF WASHINGTON INC
Services
Transportation
7.63
Low
2020-03-31
15
DHI
HORTON D R INC /DE/
Services
Construction
7.60
Low
2020-03-31
16
EA
ELECTRONIC ARTS INC.
Services
Technology Services
7.48
Low
2020-03-31
17
CPRT
COPART INC
Trade
Wholesale
7.28
Low
2020-04-30
18
LEN
LENNAR CORP /NEW/
Services
Construction
7.16
Low
2020-05-31
19
JKHY
HENRY JACK & ASSOCIATES INC
Services
Technology Services
7.12
Low
2020-03-31
20
ANSS
ANSYS INC
Services
Technology Services
7.00
Low
2020-03-31
21
CTSH
COGNIZANT TECHNOLOGY SOLUTIONS CORP
Services
Business Services
6.66
Low
2020-03-31
22
SPGI
S&P GLOBAL INC.
Services
Business Services
6.55
Low
2020-03-31
23
NUE
NUCOR CORP
Resources
Metals & Mining
6.22
Low
2020-04-04
24
TYL
TYLER TECHNOLOGIES INC
Services
Technology Services
6.20
Low
2020-03-31
25
CTAS
CINTAS CORP
Services
Business Services
5.97
Low
2020-02-29
Additional Breakdowns Not too surprising to find Facebook and Google on this list of companies at low risk of going bankrupt given all of the cash that they have stashed away. Just for the fun of it, I took a look at some selected retail companies and airlines. Retail__Airlines__Results of Altman Non-Manufacturing Z-Score Analysis Filings Data from Quarter Ending March 31, 2020 The full set of parameters can be found on the supporting Excel document in GitHub. Analysis As an initial step we are going to compare the five highest-risk manufacturing firms with the lowest risk. Comparison of Low vs. High Risk Manufacturing
Ticker
COTY
NWL
KHC
F
GM
ABMD
ISRG
MNST
IPGP
VRTX
SWKS
X1
0.04
0.08
0.04
0.14
0.05
0.50
0.59
0.33
0.75
0.53
0.46
X2
(0.37)
(0.37)
(0.04)
0.09
0.15
0.69
0.36
1.52
1.08
(0.20)
1.29
X3
(0.53)
(0.45)
0.10
(0.03)
0.02
0.68
0.37
0.98
0.25
0.61
0.56
X4
0.12
0.43
0.49
0.07
0.11
54.45
37.37
24.81
18.03
18.12
15.67
X5
0.43
0.69
0.24
0.57
0.49
0.69
0.43
0.88
0.47
0.54
0.64
Z-Score
(0.30)
0.38
0.85
0.84
0.81
57.01
39.12
28.53
20.57
19.60
18.60
Risk
High
High
High
High
High
Low
Low
Low
Low
Low
Low
Review of the above chart shows how much influence X4 (market value of equity / book value of total liabilities) has. This makes sense as it gives a view of what people think the company is worth vs. how much it owes. However, also note that X1, X2, and X3 are also all consistently lower for the high-risk companies. Notice both Ford and GM have made this list. It may be worth digging into whether there is a particularity of in capital structure in the automotive industry that results in these high-risk scores. Comparison of Low vs. High Risk Non-Manufacturing
Ticker
VRSN
APA
CXO
DPZ
EXR
NVR
MKTX
FAST
ANET
INTU
X1
0.83
(0.06)
0.58
1.94
(3.53)
2.63
3.25
3.17
4.41
1.82
X2
(28.64)
(2.45)
(1.44)
(6.82)
(0.14)
6.78
2.21
2.23
1.35
4.44
X3
3.02
(3.61)
(6.34)
2.83
0.50
1.65
2.08
1.82
1.24
1.33
X4
(0.45)
(0.02)
1.66
(0.70)
0.47
1.71
4.78
2.22
2.35
1.63
Z-Score
(25.24)
(6.14)
(5.53)
(2.76)
(2.69)
12.77
12.32
9.44
9.35
9.22
Risk
High
High
High
High
High
Low
Low
Low
Low
Low
For non-manufacturing companies the profitability measure (X2: retained earnings / total assets) drive the differences. However, X4 also is a significant factor even though it is calculated differently for non-manufacturing companies. Other items that show through is the large number of REITs that are listed as the highest risk companies. This is particularly troubling given that the full impacts of COVID are likely not reflected in the filings data at this time. Conclusion Of the 440 companies analyzed, 112—a full 25%—were rated as high risk by the Altman Z-Score. A full third of non-manufacturing companies rated as high risk. This does give one pause. This analysis is just a first pass, but it certainly does explain why Professor Altman is ringing the alarms. Research is always a journey where one analysis lead to more questions to explore. The questions that come to mind when viewing the results of this quick Z-Score analysis are:
- 1Do other measures of financial distress produce similar results?
- 2If they do, is this information truly priced into the market?
- 3What will this look like when the full set of second quarter earnings are in?
- 4Where are the risks and opportunities?
More to come… Data Provided by TagniFi. More at https://tagnifi.com/. Charlie Strout is founder of Seven Shadow LLC, and independent research and consulting firm. More on Charlie can be found at https://charliestrout.com/. DISCLAIMER: This article is for informational purposes only. Nothing in it is intended as advice to buy or sell a security.
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