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Just Don’t Call It Optimism
I'm sympathetic to the possibility that a true reckoning for US corporate profits may still be one (
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The real bellwether this cycle will be… T. Good old American Telephone & Telegraph. And they’ve already reported earnings, just no one seems to have noticed.
Having now divested all of their media business, it’s a much simpler company now. So how did they do?
Top line: beat
Bottom line: beat
New wireless subscriptions: big beat
New fiber subs: big beat
They even guided revenue projections for FY22 Up by about 10%. So how did T respond?
Worst day since 2002.
The only negative was a guide-down on FCF forecast. This guide-down was from 2 sources. 1) 5G rollout more expensive than originally planned. 2) increased slow/late/non payment from customers. Average customer payment time worsened by over 2 days. And that was the bombshell that sank the stock.
Cellular service isn’t a discretionary expense anymore, and while there are cheaper options than AT&T, the phone companies are doing just fine.
But their customers aren’t.
I get ATT Internet and VOIP phone service. My internet is supposed to be 18-20meg service but within the last year I noticed one download coming in at 56k! Yesterday I was opening a video clip from a friend and it was downloading at a steady 2.1 meg. I live in a top 20 market and this is the best internet they can provide and they even cheat me on what they sell me. The phone only works 90% of the time. Sold my stock after 30 years.
The mid/high income consumer entered 2022 with lots of extra cash, big housing and stock market gains, hot job market, pent-up demand, all driving spending. All that momentum won’t dissipate and reverse in just one or two quarters. Needs three and four.
Have you ever had the disorienting feeling of hearing your friends buzzing about things you’ve known about for days or weeks? Agonizing over things your friends have never heard of?
I’ll guess most readers of this site were expecting the economy to weaken and markets to fall, long before the average person did, and were tightening belts (unless you’re among those who don’t need to) when the average person was enthusiastically accelerating spending plans.
Doesn’t mean you’re better than anyone else. They are doing their jobs and you are doing yours. Their jobs are to heal sick, teach children, balance books, design machines, raise family, fix leaks. Your job is to anticipate economic and financial things before they happen. They consume a few minutes of news a day (used to be more, but alas social media is not news). You’re consuming it 24/7 (who wakes up at 2 am every night to check Asian news? not them). They may be happier, healthier, better-adjusted, well-rounded, doing more for the planet and their fellow human, better people. You’re just an investor. (Don’t take this personally, ok? If you want to replace “you” with “me” that’s fine.)
Getting back to the point, investors can be correctly anticipating consumers to pull back and earnings to slump, but incorrectly expecting it to all happen right away.
I think we should watch the canaries. Who gets hit first in recessions? Lower income households. How are they behaving? Shifting back to food-at-home, driving less, buying less, delaying their bills, going increasingly delinquent.
Look for that behavior to migrate “up”, and as it spreads to the mid/upper-mid income households that are the core customer for most consumer-facing businesses, look for misses and guide-downs to accelerate.
Seasonally, 3Q is normally prime “harvest time” for misses/guidedowns.
Following up, how large (in aggregate) is the canary?
Let’s call US “low income” households those with less than $40K annual income, “middle income” those with $40K to $150K income, and “higher income” those with $150K or higher income. This (very) roughly corresponds to most definitions e.g. Pew Center. DG’s average customer income is about $40K, WMT’s $74K, COST $100K.
Low income $150K: 14% of households, 42% of pretax income, 29% of expenditures, 80% of taxes paid, 74% of savings.
From 2020 data https://www.bls.gov/cex/tables/calendar-year/aggregate-group-share.htm#cu-income