Weekend thoughts: The strange macro environment
Markets have certainly been brutal this year (unless you were invested in energy stocks, then they’ve been a picnic!).
Obviously, markets are forward looking; they look past current results to what’s gong to happen in the future. And with energy prices soaring, high inflation, rising interest rates, and geopolitical uncertainty caused by Russia, the markets are looking at the future and saying “Yikes!”
But it creates a really strange divergence. Plenty of companies are reporting results right now that are basically the best they’ve ever seen, and they’re not seeing a slow down in the near future. For example, Disney reported this week, and on the parks side of the business they sounded borderline euphoric over the demand / utilization trends there. They’re forecasting 100% utilization for the upcoming quarter, and that’s despite international travel still being way down thanks to COVID. (Quote below from their Q2’22 call)
If you remember, last quarter, we mentioned that we had some high hopes for it, but we were seeing well above what we had anticipated. Well, I'm happy to say that in Q2 we're even, as you say, we're lapping those numbers again even higher. So we're very, very encouraged by the continuation of the trends that we're seeing in terms of the number of people.
DIS isn’t the only one forecasting strong trends. There’s probably nothing more discretionary than gambling, and particularly heading to Vegas to gamble (or a company sending people to Vegas for a “work conference”). I reviewed most of the gambling / casino companies calls over the past few weeks, and you’re certainly not seeing signs of slow downs there. For example,
MGM saw continued strength in April and is seeing no signs of the consumer slowing down or changing behavior; in fact, they noted pricing power on hotel pricing / food and everage.
PENN reported record Q1 results driven by strength “across all segments” (they also noted some of their properties are currently doing more in EBITDA per quarter than they did a few years ago). They were also asked a variety of ways if they were seeing the consumer weaken, and they basically said “no” every time (in fact, they called out that some of their lower end consumers were moving into “mid-core” level consumers).
CZR was basically the same; in fact, they noted January and February were weak (driven by Omnicom), and as that subsided the business started to explode higher (they called out particular strength in March that continued to accelerate in April)
You can do this exercise for a bunch of companies. EXPE is probably my favorite in this category; they didn’t just note strong demand; they noted “a recovery that seems too strong to be held down” and were super bullish on the summer outlook. People freaked out about Amazon’s earnings, but they noted “customer demand does remain strong” and "said several times “we’re not seeing any softness” and that they didn’t see macro factors impacting the demand side.
Again, I know markets are discounting mechanisms, and they can look beyond current numbers to how things are in the future. But it’s still a strange combination. Many of these businesses are trading for very cheap multiples, gushing cash flow, and hammering their share counts with repurchases. Maybe a recession does come…. but recessions also end, and if you look at these companies on a normalized basis they look quite cheap (and the current cash flow gush give them a fantastic balance sheet that will let them survive even a very bad recession).
Just to pull one example, consider PENN. It became a meme stock thanks to its ownership of Barstool, and shares peaked at almost $150/share in Feb. 2021. Today, the stock is trading for just over $30/share, giving them a ~12x LTM P/E despite a pretty substantial investment into their online / interactive business. The company authorized a $750m repurchase alongside earnings in early February, and they quickly bought back ~2% of the company in the rest of the quarter at ~$46/share. With the stock currently at $30/share, management’s been pretty clear they see value in the stock and will be aggressive with repurchase (their Q1 earnings call include quotes like “We continue to see a dislocation between where we value our shares and where they are currently trading, and we expect to allocate capital accordingly if this dislocation persists” and “So we were obviously active in March for as long as we could be, which got us to that average price of roughly $46. With our stock where it is now, I think it's fair to say that if we thought our stock was undervalued at $46, we think it's undervalued in the high $30s.”).
Maybe markets are right and we’re heading into a recession. But it feels more than priced in already. The world is a scary place, but stocks look cheap, and companies continue to post great results. Nearly across the board, stock prices look attractive.