Supply chain woes overrated? Market expectations don’t match headlines

“Forcing ourselves to express how sure we are of our beliefs brings to plain sight the probabilistic nature of those beliefs, that what we believe is almost never 100% or 0% accurate but, rather, somewhere in between.”

– Annie Duke, Thinking in Bets

Unless you’re living under a rock, you know supply chains right now are fucked. WSJ ran a good article on this on Friday if you want an overview. One telling excerpt:

High freight rates and slow deliveries are softening Q4 earnings expectations

Exactly how bad are supply chains and how long will they stay screwed up? That’s why I ran the Annie Duke quote above. There is a range of outcomes here and it’s possible the market is mispricing them.

I’ve been on my soap box a lot in this letter talking about how macro news generally doesn’t matter, and I stand by that. That said, if companies are talking about macro factors in earnings calls and guiding up or down because of them, I will pay attention to those factors. A number of companies I own mentioned supply chain issues as a headwind (ex. CROX, AZO) in Q2 earnings.

TRTN is probably the only company I own that cited this as a massive tailwind that has been transformational to their business, mainly in the ability to lease containers at higher rates for longer as customers try to get ahead of more supply chain issues. The behavior with locking in expensive container leases reminds me of a lot of home buyers who are buying now at what seem like expensive prices to lock in low mortgage rates and move before stuff gets worse. The expectation of a worse environment in the future for buyers tends to cause buyers to rush to buy. From the linked article, this is happening with Christmas trees:

​It is already too late to save all of the Christmas retail season in many cases, as overwhelmed world-wide transportation networks limit supply—down to the home décor. “If I can give one piece of advice to consumers right now, it is to find and buy your Christmas tree early,” said Jami Warner, executive director of the American Christmas Tree Association.

The market in my opinion thinks this environment could continue possibly for years and is discounting the terminal value of retailers as a result. Dollar Tree (DLTR, -7.6% YTD) and Bed, Bath and Beyond (BBY, -17.6% YTD) are good examples here.

Strangely, shipping and container leasing stocks recently have drawn down. ZIM is down 25% over the last month, Maersk is -11% and TRTN despite being up 2% in the last month has underperformed the market YTD (+11.8% v +18.7% on SPY). If you compare these names against each other, the results to me show that recently expectations are somehow worsening for retailers and shippers:

Shipping and retail have both sold off recently.

One side note on this chart is that it still baffles me TRTN is trailing the shipping names as much as they are and SPY:

  • Shippers build ships and charge based on day rates. Triton leases containers for 13+ years in the current environment at a rate set at lease origination time. Triton has a more certain series of cash flows headed its way than shippers
  • It’s easier for Triton to turn capex on and off (building a ship versus buying a container with an end user)
  • The 25% fleet size increase Triton has done through capex this year is going to boost the intrinsic value by more than 25% (longer lease terms and higher rates than previous years, impact of compounding, etc.).

But I digress. What I’m trying to say here is the market’s behavior contradicts the idea that the shipping’s gain is the retailer’s loss and vice versa. I don’t know what is going to happen with the current supply chain environment. But I do know that current conditions can’t persist forever. Even the market is saying that on expectations of ZIM’s earnings:

Analysts aren’t sold on a supply chain crisis into 2023.

Yep – from $33.7 in 2021 to $10.36 in 2023 on the high, and $29.37 to $0.26 on the low. Analysts seem to be pretty convinced we’ll have a normal environment (or even low price shipping environment) in 23. Historically it’s worth noting this volatility is normal:

Yes, ZIM did ~$52mm in 2016 EBITDA. Trailing twelve months is nearly $3bn (ZIM 20-F)
This is a truly amazing slide (ZIM Q2 investor deck).

What this tells me is shipping conditions can change a lot in 5 years. 

Based on estimates and history, I think the market is not pricing in either an early end to the supply chain crunch or even a 3+ year sustained bad environment. What this means I think is there is money to be made on either side. I like owning retailers and TRTN because expectations are getting worse for the former and not changing for the latter. ZIM estimates and the general shipping space sell off tell me most people aren’t betting on this going beyond 2022.

Back to that Annie Duke quote, it’s always interesting to me when an assertion about the economy is widely help (supply chains are going to be bad for a long time) but the market doesn’t quite support that (shipping stocks selling off, EPS estimates in 1-2 years out declining). In situations like these, I like to think a lot of prospective buyers of stocks get flushed out (“I’m not touching retail in this environment”). There may be some discounts to be found in plain sight.