Which industries are currently over-earning?

[Nell-e]

I'm starting this thread so people can chime in and highlight industry risk.  I'll start off with a couple of industries.

 

1) The obvious one is brick and mortar retailers who serve the middle class.  Still too many malls.  Not sure about high-end retailers.

 

2)  I think the US auto industry is over-earning because it's had massive tailwinds.  Peak sales volume over the last couple of years (pent-up demand from GFC).  Last year, the hurricanes helped.  Average sales prices likely to fall.

Low interest rates have helped customers to pay for price increases. Automakers offering more incentives. Recovery of housing prices.  Low gas prices.  My understanding is a lot of cars are coming off lease so the inventory of used cars will rise.  As a result, used car prices are expected to fall.

 

Interested to hear what other industries COBF members think are currently over-earning because of cyclical tailwinds or one-time occurences (i.e. the freight car industry during the fracking boom).

 

 

[Liberty]

I think a lot of parts of the healthcare industry in the US are over-earning. The parts that are making things more efficient and keeping costs down are probably safe, but the parts that have seen rapid price inflation for decades probably will get on a new trajectory at some point.

[writser]

Big tech?

[John Hjorth]

I think a lot of parts of the healthcare industry in the US are over-earning. The parts that are making things more efficient and keeping costs down are probably safe, but the parts that have seen rapid price inflation for decades probably will get on a new trajectory at some point.

 

Example: NVO 2017 ROE 80 percent. [Perhaps some board member may wonder why it's still not possible to see my shoe soles covering my butt with this one.]

[DTEJD1997]

Education is definitely "over earning".

[Foreign Tuffett]

US healthcare: healthcare is such a big chunk of GDP and everyone hates the current system; at some point parts of the industry are going to have their margins squeezed

 

US Airlines: making more money than ever before, but ULCCs are going to crash the party eventually

 

Auto OEMs: auto financing in the US has become very loose and the manufacturers have been temporary beneficiaries

 

Low quality enclosed shopping malls, specifically class D and C and some class B malls

 

I also think many Chinese companies are over earning based on the excess leverage and structural imbalances rampant in the Chinese economy. I recognize that this is a macro view that most value investors probably don't share (typical value investor: "I don't have a macro view on Chin.......but everyone knows the Chinese economy is going to grow alot and [insert big Chinese tech company here] will be a big beneficiary.")

[Nell-e]

Another thing with the airlines is that there's a pilot shortage without a quick fix.

[vinod1]

Consumer Packaged Goods Industry.

 

Not for cyclical reasons but more for structural changes. Many of the changes brought about by Internet are chipping away at almost all of the advantages these companies used to enjoy.

 

In addition these guys have increased margins considerably over the last 20 years compared to their previous 50 years. It seems likely that margins would be significantly compressed for many of these companies over the next couple of decades.

 

Vinod

[BPCAP]

Semiconductors and airlines

[Nell-e]

guns and ammo / NFL football

 

Also sooner or later, it looks like medical supply industry is going to get hit:

 

https://www.wsj.com/articles/amazons-latest-ambition-to-be-a-major-hospital-supplier-1518517802

 

 

 

[Liberty]

Big tech?

 

If anything, big tech is under earning. Google is spending billions on venture-capital-type investments and reinvesting a lot into Youtube growth, Facebook is not really monetizing Messenger, Whatsapp, and is just getting started monetizing Instagram, and ARPUs outside North America are still pretty low, Amazon is reinvesting everything into growth, same with Netflix... Pretty much any of these companies could by choice make its earnings balloon up if they wanted to, but that might not be the best long-term decision for value creation.

 

Regulatory intervention is always tricky. Can have an impact, or can entrench you further by making it impossible for new entrants to compete because the regulation just makes it harder to operate in the industry for sub-scale players. ¯\_(ツ)_/¯

[DooDiligence]

Big tech?

 

If anything, big tech is under earning. Google is spending billions on venture-capital-type investments and reinvesting a lot into Youtube growth, Facebook is not really monetizing Messenger, Whatsapp, and is just getting started monetizing Instagram, and ARPUs outside North America are still pretty low, Amazon is reinvesting everything into growth, same with Netflix... Pretty much any of these companies could by choice make its earnings balloon up if they wanted to, but that might not be the best long-term decision for value creation.

 

Regulatory intervention is always tricky. Can have an impact, or can entrench you further by making it impossible for new entrants to compete because the regulation just makes it harder to operate in the industry for sub-scale players. ¯\_(ツ)_/¯

 

China would be a good place to look for the results of gov intervention in tech.

I'm not sure how you'd go about defining results but...

[Liberty]

I wasn't even looking at China. In the US, you can look at telecoms/cable in the past, or healthcare, pharma, or education... All highly regulated, creating high barriers to entry favoring incumbents over entrants and not affecting profitability much (or making it better, if anything).

[Foreign Tuffett]

I wasn't even looking at China. In the US, you can look at telecoms/cable in the past, or healthcare, pharma, or education... All highly regulated, creating high barriers to entry favoring incumbents over entrants and not affecting profitability much (or making it better, if anything).

 

This is a good point. Another great example of this is Big Tobacco

[Liberty]

I wasn't even looking at China. In the US, you can look at telecoms/cable in the past, or healthcare, pharma, or education... All highly regulated, creating high barriers to entry favoring incumbents over entrants and not affecting profitability much (or making it better, if anything).

 

This is a good point. Another great example of this is Big Tobacco

 

You can also go back to the breaking up of the big trusts last century. This is held as a watershed antitrust moment, but if I remember correctly, the shareholders of the broken up entities did quite well.

[Rod]

I would guess that Cannabis stocks are in some sense "over-earning", more through expectation than current fact. Investors in these stocks seem to believe that Cannabis margins will be around 80% or so based on current prices. They seem to ignore the surge in supply that is coming, which will crater the price.