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Which industries are currently UNDER-earning?


Nell-e
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Here's the thread for industries that are OVER-earning:

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/which-industries-are-currently-over-earning/msg324336/?topicseen#msg324336

 

Invert always invert- which industries are under-earning due to temporary capital spending, macro headwinds, secular shifts, or changes in the regulatory environment? I'll put forth my guesses

 

1) plain vanilla US Regional Banks?  - low net interest margin, deregulation expectations, better tax rates, more fiscal stimulus to broader economy from the tax cut

 

2) catastrophic insurers who took it on the chin from the hurricanes last year

3) industries catering to babies, young parents in China due to the end of the 1 child policy

 

What do other members think?   

 

 

 

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I am going to disagree on the plain vanilla & regional banks.

 

I think right now the banks are operating in a very easy business environment and are making good money.

 

Real estate is up, bad loans are very low...

 

A few years from now, that might be a very different case.

 

Banking seems to be a very cyclical industry with big blow ups every 10-15 years.

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I think one should start with the base case that the market is relatively efficient and built into prices is some inkling of earning power and business quality. Of course, around the edges, the market is not efficient at all and this spells opportunity. On a temporary basis if you look at some of berkshire's smaller moves like SYF and some store REITs you would think they believe the consumer is under-earning! And in fact all eyeballs were on the 2.9% wage inflation. If wages rise, perhaps consumer stocks and financials are under-earning simply because the consumer is under-earning :)

 

"It was the fifth consecutive year of annual household debt growth with increases in the mortgage, student, auto and credit card categories."

 

https://seekingalpha.com/news/3330822-u-s-household-debt-soars-13t

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Things I think are under earning:

 

Labour - corporate profits very high vs wages

 

Disney - content library monetization via streaming service a meaningful catalyst in 2019+

 

Canadian oil/gas - WCS and AECO spreads should both come in, even without new pipelines

 

Wages in general have been going up.  I was surprised to learn that minimum wage in Michigan is now a little bit over $9/hour.

 

Wages for attorneys have also been going up...until the other day.  I saw a large bankruptcy project looking to bring attorneys on board for $20/hour.  I was surprised to see that as I've seen projects paying $23-$24/hour and even $25/hour!

 

Overall though, I think I would agree that wages are going up in the near future.

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Land developers active in Alberta and Saskatchewan. Residential land development is slow due to the crash in oil. The prices of the developers stocks do not reflect any expectation of recovery. Case in point: Dream Unlimited (DRM-T), also Melcor Developments (MRD-T).

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Land developers active in Alberta and Saskatchewan. Residential land development is slow due to the crash in oil. The prices of the developers stocks do not reflect any expectation of recovery. Case in point: Dream Unlimited (DRM-T), also Melcor Developments (MRD-T).

 

Perhaps Dream deserves it's own thread, but I have followed it for several years and don't understand the capital allocation, in particular the huge amount of capital they've devoted to buying shares in what ought to be the retail-oriented REITs they manage.

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Land developers active in Alberta and Saskatchewan. Residential land development is slow due to the crash in oil. The prices of the developers stocks do not reflect any expectation of recovery. Case in point: Dream Unlimited (DRM-T), also Melcor Developments (MRD-T).

 

Perhaps Dream deserves it's own thread, but I have followed it for several years and don't understand the capital allocation, in particular the huge amount of capital they've devoted to buying shares in what ought to be the retail-oriented REITs they manage.

 

The largest part of their shares in Dream Office were obtained in exchange for giving up the management contract. They have been more active in buying shares in Dream Alternatives. I would guess there are a few reasons why they are doing it. One, they want to increase the level of recurring income to balance the volatility of the development business. Two, they see the shares as undervalued. Three, and this applies mostly to Dream Alternatives, they want to be able to demonstrate to the market that they are large investors in their own fund. They have ambitions to grow Dream Alternatives by issuing new equity at NAV. Currently it trades well below NAV. This is a similar strategy that Brookfield uses. Reason number two has been confirmed by management, one and three are my own guesses.

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Indian OTAs

 

KJP,

 

I am curious to know why you think Indian OTA's are under earning. How do you think about competition from booking.com in that space? I think indian OTA's also don't have an agency model. They buy inventory and guarantee revenue to the hotels. This is not very capital efficient. Sometimes they sell at a loss to gain market share

 

There are other players like ZO rooms ( Backed by Tiger Global) and OYO rooms that are competing with YTRA and MMYT. Seems like a competitive space in a nascent industry

 

Curious to know your thought process

 

Thanks

 

 

 

 

 

 

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Indian OTAs

 

KJP,

 

I am curious to know why you think Indian OTA's are under earning. How do you think about competition from booking.com in that space? I think indian OTA's also don't have an agency model. They buy inventory and guarantee revenue to the hotels. This is not very capital efficient. Sometimes they sell at a loss to gain market share

 

There are other players like ZO rooms ( Backed by Tiger Global) and OYO rooms that are competing with YTRA and MMYT. Seems like a competitive space in a nascent industry

 

Curious to know your thought process

 

Thanks

 

The Indian OTAs are more of a mix with a respect to an agency model than Priceline.  For example, Yatra appears to do air and hotel on an agency basis, but take primary risk on packages.  See, for example, the description of "net" versus "gross" revenue recognition  for the various revenue buckets on page 60 of Yatra's Form 20-F.

 

More broadly, I think you captured why the industry as a whole is currently underearning -- right now it's a fiercely competitive land grab where companies are spending money hand over fist on marketing and promotions to get scale and, hopefully, customer loyalty.  That's causing everyone to lose money right now.  I don't believe the capital spigots will flow forever.  So, eventually things will shake out and somebody or a few somebodies in the industry are going to make money.  That's what ought to happen where you're talking about a distributor that sits in the middle, with millions of buyers on one hand and more than 100,000 hotels on the other hand.  That's the basis of my belief that the industry as a whole is underearning what it should.  Unlike many of the other industries mentioned on this thread, the underearning I'm suggesting is coming from the immaturity of the industry, rather than cyclicality. 

 

As for Priceline (booking.com and Agoda), do they have the stomach to throw money at India like MMYT, Yatra, et al. are doing? The commentary in Priceline's Q2 call about the difficulties public companies (particularly mature ones) have with pursuing that kind of strategy suggests it may not.  Moreover, other than deep pockets, Priceline has no special advantage in India.  Instead, it's got to get on the ground and build its hotel network and brand awareness just like everyone else. 

 

Even if they are correct (and they may not be), are any of the thoughts above actionable?  I haven't yet invested based on them, because I'm not smart enough to figure out who will be left standing.  MMYT may also spend Yatra into oblivion, forcing it to be bought out on the cheap.       

 

 

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Here's a slide deck from Ensco, an offshore contract drilling services provider to the oil and gas industry.  Slide 4 shows the long term history of the company's offshore rig count.  Does anyone have an opinion on where we are in the cycle with this industry?  Rebound or double dip?

 

https://seekingalpha.com/article/4146715-ensco-esv-presents-23rd-annual-credit-suisse-energy-summit-slideshow

 

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"US workforce? 20+ years of stagnating incomes coming to an end, maybe?"

 

Just finished Homo Deus, by Yuval Harari:

https://www.amazon.com/Homo-Deus-Brief-History-Tomorrow/dp/0062464310

 

Of course, who knows the future but his take would imply that advancing technology will tend to increase the divide between those who bring value and the regular Joe.

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