Consensus -- are we at peak earnings, or just the beginning of a boom?

November 18, 2021

by a searcher from Harvard University - Harvard Business School in Washington, DC, USA

I am focused primarily on consumer sectors.

Most companies I'm seeing right now have the following pattern:
- EBITDA up###-###-#### % 2019 vs. 2021E
- Sales up 10-25% 2019 vs. 2021
- Costs flat, slightly down or up 2019 vs. 2021

Bears would say 1) costs go up from here -- wages, fuel, rent, input costs all have severe price movements, and 2) demand slows or falls back to 2019 levels, so###-###-#### EBITDA is 2019*(1+real growth+inflation)

Bulls would say 1) a good company can pass the costs through, and 2)the boom is self-reinforcing and causes more demand (MMT), so###-###-#### is 2021*(1+real growth+inflation).

Of course, it depends on the sector, but ignoring outlier sectors like outdoor pool companies or downtown conventions., the high 2021 EBITDA pattern cuts across almost every company I see, be it products or services. Almost every valuation implicitly is making a macro bet, and the range is substantial.

Curious how searchers and investors are thinking about this?

Reply by a professional
from University of Southern California in North Palm Beach, FL, USA

Be careful becoming excited about an upsurge in revenue and profit.
It could be fool's gold. No matter what industry in which you want to buy a business. Beware of the risk culprits: Supply chain; labor shortages and costs; competitive advantages; industry rollups; quality of earnings; business buyer competition. Last but not least: Company/industry/customer behavior before/during/after Covid.

One of the most important values I contribute to my clients is helping them realize that sustainable return on investment trumps nearly everything else. We keep that in mind when we’re selecting sectors to target.

This article tells the tale: North Carolina’s Furniture Hub Is Booming. What Comes Next?
The furniture capital of the state is ground zero for inflation, labor shortages, hot demand and limited sustainable supply. It’s debating how to cope.

https://dnyuz.com/2021/11/27/north-carolinas-furniture-hub-is-booming-what-comes-next/

Reply by an intermediary
from The University of Chicago in Radnor, PA 19087, USA

This comment is specifically focused on consumer products companies. If sales are heavily weighted towards DTC, then your sales pattern is off. Most companies with heavy weighting to DTC sales showed sales growth over the past two years of 20%-35% annually. Companies with weighting towards wholesale sales showed either low growth or a decrease in sales due to the pandemic closures in retail. Also, while direct product costs have been flat, supply chain costs have gone up dramatically. These are most likely temporary and pro forma projections should be adjusted accordingly. Even though costs may go up if inflationary pressures continue in the macro economy, consumer product companies with an omnichannel strategy weighted towards DTC will continue to experience sustained growth and will provide very good opportunities. This opinion is substantiated by the price premium in share prices for public consumer products companies executing this business model.

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