Post by
retiredcf on Apr 05, 2023 9:32am
CIBC
Conference Recap & Preferred Stocks
Conference Takeaway: Conditions Unclear, But Cautious Optimism
Crystal ball predictions vary, but one well-held view seems to be that the range of economic outcomes for this year has not been so wide at any point in recent memory. Record inflation, ongoing labour market tightness, increasing wages, substantially higher borrowing costs and shifting consumer behaviours and spending patterns have made life difficult for businesses, and that’s after three years of “unprecedented” conditions. On the bright side, a cautious consumer is a known adversary, and we emerged from our conference with the view that consumer businesses are relatively well positioned for an environment rife with uncertainty.
Similar topics were asked of many different companies at our conference. We highlight the most relevant ones below, and explore each topic in greater detail in the next section.
• Trade-down And Consumption Patterns: The general consensus is that consumers
remain prudent and cautious, seeking lower prices and/or larger package sizes, and are more eager to take advantage of promotional offers. Where opinions vary is whether trade-down will revert as inflation subsides, or if consumers will remain wary and continue more parsimonious shopping habits.
• Labour Market Dynamics: Availability has improved but remains a challenge for many businesses, particularly grocers, and wage inflation appears to be an increasing pest. So after consecutive years of sizeable labour cost increases, we see no respite for corporations. Both Quebec and Ontario have announced 7% increases to their minimum wage this year, which we expect will have inflationary effects on all wages. What’s different this time around is that we expect passing on these higher costs will now become more difficult after years of doing so with relative ease.
• Supply Chain And Freight: Supply chains are operating with fewer disruptions now,
which brings an increasing efficiency for all businesses, but views on freight costs differ. Relative to peak periods, costs have certainly declined significantly (particularly ocean freight), but opinions vary on how this will fare over the balance of 2023.
We also present a summary of key topics and analysis on macroeconomic factors beginning on page 8. We will quickly join the chorus in another round of “we are not economists,” but given we cannot recall a time when macro has been this important, we present what we believe to be the most important factors and contribute our views.
Preferred Stocks: Uncertainty Favours Safety
As we detail in the coming pages, different economic indicators point in different directions. The negative side of the scale probably outweighs the positive, but one thing is clear to us: the current outlook for equities in the consumer space is murky at best. We ultimately see restrained optimism and more disciplined spending from consumers. It’s difficult to imagine that housing market doldrums and the ongoing reminders of possible tail events won’t weigh on consumer sentiment and wallets.
The worst-case scenarios of systemic inflation and severe recession aren’t in our forecasts, but we certainly prefer defensiveness in the current environment.
With that in mind, our investment recommendations tilt towards Staples over Discretionary, and generally lean towards large, liquid, and defensive names with relatively low leverage, solid track records and multiple levers for growth. Staples have significantly outperformed Discretionary since early 2022, as shown in the line chart in Exhibit 1, but this is mostly a function of earnings growth: the average valuation spread between the two sits at 1.7x NTM P/E, modestly below the two-turn average since the beginning of 2021 as shown in the line chart in Exhibit 2. Our top names at this time include Loblaw, Couche-Tard, and Pet Valu.