Charlie and I never spend a day talking about macro.Warren Buffett
I spent a good chunk of Saturday catching up on Q2 earnings and what is standing out to me is that companies are telling us COVID was a one time event. For some (ex. AMZN), this one time event led to a tough comp and a pull forward in demand. For others (ex. IMAX), COVID created a time period where demand was legally restricted from coming to the market, and now demand is normalizing again. While now this all feels very normal, I encourage everyone to think back to Q2 of last year and reflect on the probably dozens of articles you read that said COVID changed everything.
Here’s a good quote from AMZN’s Q2 that shows how Amazon’s earnings are now normalizing
And really, the only difference I see in Q2 versus Q1 and before is the year-over-year comp, which we had factored in, but also the increase in mobility. I think the impact of people getting vaccinated and getting out in the world, not only shopping off-line, but also living life and getting out, it takes away from shopping time. It’s a good phenomenon and it’s great. And we just have to appropriately gauge our run rate going forward.AMZN Q2 2021 earnings
Did we expect people to not live life normally ever again?
I do subscribe to the theory that history rhymes, and as a result I’m not factoring in Delta variant to any buy / sell decisions I’m making. In fact, I’m not letting macro guide any buy / sell decisions I’m making. In theory (and I’m the first to acknowledge I don’t always do this in practice), all that matters to me is that I can buy under intrinsic value (the discounted value of future cash flows) and have some visibility on how a business could play out in the next 3-5 years.
I’ve chatted with some readers recently on how NCMI has got pounded in the last month while other picks from this letter like CROX and NET have surged. That’s volatility for you. NCMI I know has been a tough one for readers as a swift ~33% drawdown has happened on zero company news. Narratives on Delta and the rise of streaming are again very available for anyone who wants to find them. Less available is a 5 year model for NCMI with what cash flows will look like in 2026.
But to the bears, this hardly matters as the Q3 + Q4 Delta impact and the predicted death of the exclusive theatrical window justify selling today. On the former – I don’t let uncertainty around two quarters impact my thoughts on the terminal value of a company. On the latter – are we really sure the exclusive theatrical window is dead? Last time I checked, every major studio outside of Disney has committed to it and DIS itself says COVID is the only reason for dual releases. Oh yeah, and DIS is in the middle of a very public tiff with actress Scarlett Johansson on their temporary refusal to respect the window. You think other A-list actors and actresses may be looking on and thinking about this next time they negotiate with DIS?
If you zoom out a year or two, the discussion around streaming and COVID is going to be very different than it is today. I know this because of what this discussion was like a year ago. At that time, many people would have told you that you were crazy if you said the domestic box office would do multiple $100mm+ weekends before the end of July 2021. They also would’ve debated you if you had said F9 overall (global + domestic) would do way better at the box office than Black Widow because F9 didn’t offer a streamed released and respected the theatrical window. Yet, these folks would’ve been 100% wrong.
It is extremely hard to predict industry trends changing forever, just like calling the top or bottom of the market. A good story is easier to hear and believe than the complicated truth. Macro and industry predictions are full of nice stories. I prefer to focus on what company management is saying and what the industry data is telling me. To that end, Q2 earnings have reiterated reasons to own stocks I own and has not delivered any ground-shattering news on companies changing.
Another point I’ll make here is management has to be accountable to shareholders. There are legal forcing functions to do so (Sarbanes Oxley) and job security reasons to do so (C-level suite is going to get sacked if the share price tanks). “Thought leaders” do not have these same forcing functions. It is extremely easy to go on Substack and rip off a 20K word piece with no supporting data and rampant speculation on where the puck is going. Same with a podcast. I’m guilty of it myself.
And because these essays / podcasts are often more interesting than transcripts and SEC filings, they get picked up by FinTwit and the narrative reinforces itself. I’m not kidding when I say this crazy cycle is creating real buying opportunities and is a reason I like boring and underfollowed stocks.
Triton (TRTN) is a good example I want to talk about. The company leases containers to shipping lines (ever see those big red 20-40 foot rectangles on trucks on the highway?). The company has been around since 1980 and is the world’s largest container lessor, with 30%+ leasing market share and ~14% overall market share (some lines own their own containers, but leasing is generally preferable since shipping is a very capex intensive industry).
I’m reading The Warren Buffett Way right now and the biggest thing I’m getting out of the book is to buy companies with sustainable RoE (net income / (assets – liabilities)) that can keep re-investing profits at the same or higher RoE. Triton to me is a good example of a company like this:
Why does sustainable RoE matter? If you have an RoE of say 25% (where is about where Triton is today), you can re-invest a dollar of profit and expect to make $1.25 in return. That means book value (assets-liabilities) can be added to at 125% of retained earnings, which can then be re-invested and can create 125% of the reinvestment, etc. You can see how over time good companies can rapidly compound book value per share.
Indeed, the company says in its Q2 release:
Overall, we expect our profitability and cash flows will remain at very high levels for the foreseeable future due to the durable benefits from our strong leasing activity this year and we expect our net book value per share will increase rapidly due to our strong return on equity.
Lease rates are historically high right now as the world struggles to deal with a shortage in supply of shipping containers. The company is doing record capex this year and originating leases at highly attractive rates with 12+ year lease terms. They’re the largest and most respected name in the leasing industry. Sustainable RoE? I’m thinking yes for the next few years.
Nothing about the story has changed. Container leasing isn’t on FinTwit. I’m very happy to just keep buying shares.
Overall, I’m reminded every earnings season that today’s new is not next year’s news. Companies give out very different information than the media and have more incentives to tell the truth. It’s hard to call industries changing forever. I’m trying to invest accordingly.