Parnassus on Companies Becoming More Relevant to Customers during COVID-19
Companies that exhibited the best capabilities to serve customers as they began to shelter in place relied on innovation long before the pandemic emerged. Remaining relevant to customers during this time requires doubling down on inventiveness, adaptability and resilience.
Companies Stepping Up
Humans are incredibly innovative, and the companies they have built are finding ways to meet the challenge of the pandemic with innovations to fight the virus and keep the economy up and running. As the pandemic has unfolded, companies that provide essential services have continued to experience strong demand. Possessing technology that supports continued operations during the shelter in place has provided a sizeable advantage. Some of these businesses have also pitched in to help address the COVID-19 threat, building positive reputations that will boost their brands over the long term.
Parnassus Investments believes that high-quality, well-managed companies that aren’t pulling back now, but instead are upping investments in R&D, will emerge stronger from the pandemic. Companies that are able to avoid furloughs and layoffs also are likely to perform relatively well. In addition, planning now for future improvements, such as rethinking approaches to supply chains that were revealed to be vulnerable, is vital.
Joining the Fight Against the Virus
As the pandemic began to unfold, some companies, like Deere and Pentair, have continued to support customers’ needs for essential products and services while also pivoting to help communities increase their supplies of protective and medical equipment. At the same time, many companies in the health care sector, such as Becton Dickinson and Illumina, are contributing to efforts to develop medical treatments for COVID-19.
• Deere & Co. leverages technology to help feed more people using fewer resources at lower costs. For example, data collected by a Deere combine travels to a data center where technicians can recommend adjustments to optimize pesticide, fertilizer and water use. Equipment problems can also be diagnosed remotely, supporting faster repairs. And to help protect medical workers during the pandemic, Deere has produced more than 350,000 face shields.
• Pentair offers customers water-efficient irrigation systems as well as water treatment, desalination and filtration products designed to expand and improve the quality of the fresh water supply. A small portion of Pentair’s business is manufacturing filtration components for hospital ventilators. During the pandemic, the company has ramped up production of these ventilator components, building goodwill with the community.
• Becton Dickinson supplies coronavirus testing products and is innovating in the moment to improve testing options. Becton also provides instruments, data analysis and platforms for vaccine research. It is a market leader across a number of medical consumables, including needles and syringes, as well as monitoring machines. The company employs approximately 1,000 software engineers and maintains a substantial R&D budget.
• Illumina is the largest provider of gene sequencing instruments and invests heavily in innovation. Not surprisingly, the company has turned its attention to sequencing the COVID-19 virus to support the development of vaccines and therapies.
Supporting the Virtual Economy
Recent events have revealed the critical importance of leveraging technology to spur economic growth. At the onset of the pandemic, the abrupt shift from physical to virtual work by millions of people provided an excellent opportunity for the following companies and others to demonstrate the essential nature of their technology-driven products and services.
• Cable One provides high-speed internet access to rural areas. Like other internet providers, this business has become even more critical during the COVID-19 shutdown. Its role in facilitating access to indispensable products and virtual classrooms is particularly vital in areas where the only other choice may be dial-up internet. Cable One is offering lower pricing for customers during the pandemic.
• Perhaps no company is more essential for remote work than Microsoft. From Office 365 to Azure Cloud Services and worldwide data centers, this company is key to high-performance computing and development. Microsoft recently rolled out Teams, a new collaborating tool. It is also notable that the company has announced plans to become carbon negative by 2030.
• FedEx has connected people with essential products throughout the pandemic, using a faster, more efficient network than competitors. Ecommerce was expected to continue to significantly grow over the next decade, even before the necessity to shelter in place arose. Now, the company has announced a new partnership with Microsoft that will offer FedEx customers better visibility into supply chains, more efficient inventory management and faster shipping.
Investing in the Workplace
Success requires an engaged and motivated workforce. Those companies that have made the health and safety of employees a top priority during the pandemic will be rewarded with employee loyalty and the ability to provide superior customer service relative to competitors that undervalue their workforces.
Companies that can avoid layoffs, and instead are able to retain talent, will perform better than those that lay off or furlough employees. This is especially true if the layoff decision is not preceded by other cost-cutting approaches, like eliminating unnecessary expenses, reducing executive compensation and eliminating share buybacks. Keeping the workforce intact supports both uninterrupted productivity and strong employee morale. It also allows companies to avoid rehiring, retraining and integrating new employees as the economy improves.
The following companies are among those that are taking steps to support employees during the pandemic:
• Verizon adopted a work-from-home strategy for 90% of its workforce, along with extra compensation for field technicians and retail workers. The company also offered generous paid leave for employees afflicted by COVID-19.
• Apparel company VF Corp. took steps to limit pay impacts for employees and provide emergency leave compensation. The firm also implemented strict social distancing requirements and cleaning protocols to protect the health of employees.
• Waste Management which provides critical solid waste and recycling services, has guaranteed hourly workers compensation for 40 hours per week, regardless of their ability to work, and pledged to avoid layoffs.
Managing Supply Chain Risks
In addition to advantages awarded to innovation and community support during the pandemic, weaknesses in corporate structures have been revealed. Notably, companies and consumers are feeling the pain of supply chain–related shortages. Businesses that had carefully managed risks and established full transparency into their supply chains prior to the crisis are now better positioned to minimize future disruptions by taking the next steps to increase supply chain flexibility and reliability. Along with introducing redundancies, some companies will likely consider bringing some supply chains closer to home. Having critical supply chains either in the US or nearby may help reduce political risks due to trade wars, and physical risk due to climate change.
These and other companies are well positioned to help transport critical products to customers and monitor supply-chain safety today and as supply chains evolve:
• Americold Realty Trust owns and operates approximately 200 temperature-controlled warehouses that form an integral part of the food supply chain, particularly as fresh produce rises in popularity. Americold also practices energy conservation.
• Kansas City Southern has a direct tie to increasing international trade and is positioned to benefit if supply chains relocate to North America to address risks that have been exposed by the pandemic.
• Costco rates highly on customer service and the quality of its products. With kinks appearing in the supply chain and concerns about virus spread, food safety precautions are high priority. Costco has partnered with Zest Labs, a startup that uses technology to achieve complete visibility into the fresh food supply chain to both protect customer health and reduce food waste.
Winning Over the Long Term
A pandemic is clearly not good news. Nor is an economic downturn. However, these unwelcome events have been accompanied by silver linings for companies that continuously learn and grow. Remaining relevant to customers in this environment requires adaptability and resilience, which is predicated on having effective and experienced management teams in place. We believe that high-quality companies that came into the pandemic with strong balance sheets, healthy profit margins, relatively low debt and an emphasis on research and development are likely to gain market share as we emerge from these difficult conditions.
Parnassus anticipates that company leaders will remember the importance of remaining nimble to meet customers’ needs and will increase their confidence that investments in innovation can drive future success. It is our hope that companies will also apply what they have learned to more urgently address other wide-ranging risks, such as climate change. Just as in this crisis, timely preparation for changes in our physical environment will likely create winners in the marketplace, while those companies that are overly focused on the short term will risk falling behind.
Article by Todd C. Ahlsten, Chief Investment Officer, Parnassus Investments and Benjamin E. Allen, Chief Executive Officer, Parnassus Investments
To learn more, visit www.parnassus.com or call (800) 999-3505.
Article published July 2020.
The mention of individual securities should not be construed as a recommendation to buy or sell. All investments involve risk, including the loss of principal.
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