Sporadic Thoughts: Consumer, Airlines Pricing Power and Google

October 21-28, 2005 - Minyanville.com

This Quarter's Theme: Consumer Weakening I am getting the feeling that this holiday season is going to be ugly, or at least disappointing. Listening to earnings calls of companies I follow (don't necessarily own their stock) I keep hearing this "consumer weakening" justification to their poor results. Arguably, their management may be hiding their poor execution behind the "weakening consumer" theme, but I am getting the sense that this theme is less an excuse and more a reality. C is for cookie, that's good enough for me This Q&A (below) from Bemis’s (BMS) 3rd Quarter conference call is fairly explanatory. Bemis makes packaging for snacks, luncheables, cookies, cheese, meat etc… : Good morning. Jeff, the last few quarters, volumes have been rather flat. Can you talk about what you think, looking through the various pieces of the business by end market, what you think are realistic growth patterns for the next few quarters in longer term. Particularly, meat and cheese was flat in the quarter. I think last quarter it was up a few ticks. Personal care has been very good, this quarter was flat. Can you give us a little sense as to where or what's happening that has sort of changed the recent trajectory of growth? Well, Chris, I think there's been some effect which we don't have perfect data on, of the high cost of energy, affecting people's buying habits. A lot of our product, a lot of food now, is bought in convenient stores and the price of gasoline is leaving less money in people's pockets as they check out of the convenient store. They don't pick up the extra candy bars or snack foods or water or meat products. So I think there's been some effect on a consumer behavior there. Source: CallStreet.com We may be seeing the first signs on consumers slowly giving in to higher gas prices, and there may be more bad news coming with higher heating costs this winter, higher interest costs on home equity loans and mortgages (that were linked to short-term rates). Pricing power A quick food for thought about airline industry: yesterday, American Express (AXP) disclosed that its booking air travel revenues were up 12%, where average ticket price was down 1%. Air travel increased - good thing for airlines. Prices declined in spite of much higher oil prices - one of the highest costs for airlines. There is very little pricing power in this industry. Anything you can do, GOOG can do better? Says who? Every day, including today, I hear blips about how Google (GOOG) may do this (start its auction site; offer web word processing, etc.) or that (start its PayPal-like service, etc.) threatening to undermine companies that have dominated those particular segments for a long time. This raises a series of questions: what does Google have that other well capitalized companies don’t? Going after eBay? Yahoo has struggled to create a viable auction site in the US for as long as I remember. Does Google have a secret sauce that Yahoo doesn’t? Big banks (talking about well capitalized companies) tried to bring out their own versions of PayPal for a long time, yet I still don’t see anything. Does Google know the money transaction business better than banks? Is Google an incredible company? – Yes. Does it have a huge amount intellectual and financial capital? – Yes. However, so do many other companies. I don’t have the answers, but I am trying to instill a sense of “gravity” (ok, call it skepticism). Google is kind of like Starbucks, which broke all the rules and turned skeptics into $5 latte-drinking believers. Maybe a healthy dose of doubt (skepticism) is still in required as gravity can only go into hibernation for so long.

Vitaliy N. Katsenelson, CFA

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