I've never thought about this concept of decreasing volume but increasing unit prices (and increasing gross profit). Thank's for switching on that light!
I like how you mix posts about quarterly earnings and more general thoughts.
This reminds me of one of the best podcasts I’ve listened on industry structure. Craig Moffett explained on Grant’s that the telecom and airline businesses suffered from extreme price competition because there were very large upfront costs (deploying fiber optic or buying planes), but then the marginal cost of an extra customer is very small. https://overcast.fm/+TYmCcBUsU
The question I think is, did illicit vapes break the volume-price algorithm at least in the USA? When revenue declines, the algorithm is broken. That's what Altria's and Reynold's results show.
Thanks for your thoughts, Simon. I think there are a few additional things to consider:
1. Is a decline over a period, whether a few quarters or a few years, strictly indicative of a permanent and irreversible trend?
2. Why focus on revenues over OI? Or for that matter, FCF? Isn't that what dictates value?
3. Even if there was a permanent trend in declining FCF, it could be argued that current equity values are too far depressed and are priced far lower than the total cumulative future FCF, even when declining.
2 and 3 are also compelling, of course. Still, I'd prefer investing in companies that compound or have the potential to compound, however slowly is their pace in doing so. And without topline growth, however small, eventually the bottom-line will stall, as costs can only be cut so much. And there's no perennial flatlining in business - either the trend goes up, or down. And with many compounders out there, also very slow compounders, that will probably keep growing their bottom line at a glacial pace, but growing it, for decades to come, intuitively it makes more sense to take this one foot hurdle, and keep looking at the glacier how it moves, instead of buying a melting glacier.
Btw. I don't think tobacco companies are a melting ice-cube. Maybe they would be if they weren't nicotine delivery companies. Still, eventually the topline will need to move to keep the bottom-line moving and the compounding to continue; else there are better places to invest.
I've never thought about this concept of decreasing volume but increasing unit prices (and increasing gross profit). Thank's for switching on that light!
Glad you enjoyed it, Dartz. Thanks!
I like how you mix posts about quarterly earnings and more general thoughts.
This reminds me of one of the best podcasts I’ve listened on industry structure. Craig Moffett explained on Grant’s that the telecom and airline businesses suffered from extreme price competition because there were very large upfront costs (deploying fiber optic or buying planes), but then the marginal cost of an extra customer is very small. https://overcast.fm/+TYmCcBUsU
Thanks for the link, Tian!
Great article. I just bought some light bulbs and fuses and know exactly what you are talking about :)
Thanks, Christian!
The question I think is, did illicit vapes break the volume-price algorithm at least in the USA? When revenue declines, the algorithm is broken. That's what Altria's and Reynold's results show.
Thanks for your thoughts, Simon. I think there are a few additional things to consider:
1. Is a decline over a period, whether a few quarters or a few years, strictly indicative of a permanent and irreversible trend?
2. Why focus on revenues over OI? Or for that matter, FCF? Isn't that what dictates value?
3. Even if there was a permanent trend in declining FCF, it could be argued that current equity values are too far depressed and are priced far lower than the total cumulative future FCF, even when declining.
Hi Devin, thanks for sharing your thoughts!
I absolutely agree with 1.
2 and 3 are also compelling, of course. Still, I'd prefer investing in companies that compound or have the potential to compound, however slowly is their pace in doing so. And without topline growth, however small, eventually the bottom-line will stall, as costs can only be cut so much. And there's no perennial flatlining in business - either the trend goes up, or down. And with many compounders out there, also very slow compounders, that will probably keep growing their bottom line at a glacial pace, but growing it, for decades to come, intuitively it makes more sense to take this one foot hurdle, and keep looking at the glacier how it moves, instead of buying a melting glacier.
Btw. I don't think tobacco companies are a melting ice-cube. Maybe they would be if they weren't nicotine delivery companies. Still, eventually the topline will need to move to keep the bottom-line moving and the compounding to continue; else there are better places to invest.