Recessions and Consumer Spending

Todd Sullivan over at Value Plays takes a quick look at consumer spending from the 1990-91 and 2001-02 recessions. Surprisingly, Tobacco spending was down. We only point this one because in recessionary times, people are quick to point out plays like Altria (MO) and Philip Morris International (PM) when, in reality, the spending in their product category is down. The increase in education spending has already played out again this recession, as the number of MBA program applicants has been very high, if not at historical highs. Lastly, we want to highlight the massive decrease in the category: food away from home. This illustrates perfectly our thesis for shorting casualty dining restaurants in a deteriorating consumer environment and going long McDonald's (MCD) as a hedge. Because, after all, if people do go out to eat, they are going to the cheapest place out there, the golden arches.

Comments

[Steven Hansen:]

one point - in the 2000 / 2001 recession, consumers continued to spend overall but changed their spending patterns. this recession is more like the ones in the 70's and 80's and the depression where consumers stopped spending.

2008 Dec 31 09:15 PM

[Market Folly:]

the hand, would agree with your assessment. just still wanted to give an overview of the 'slowdown' spending habits as we're currently in that stage and haven't quite reached the complete stoppage of spending. very possible though here in 09

Jan 02 12:19 PM

[mkreisel:]

Addicts will not give up their habits, especially if stopping these habits will cause more psychological depression during an economic depression.

The danger facing PM is that emerging economy people will swap premium brand cigarettes for cheaper alternatives. We don't know whether this is happening, but PM's results for the next 2 quarters will certainly tell us the answer.

Jan 04 02:28 PM

[Discourteous:]

Do you own Altria? Have you bought MO recently? Would you buy now, when MO is drifting around 15 and 16 (I'm asking because I've entered at 20.00 and would like to even buy more.)?

On Jan 02 10:13 PM dividendmachine wrote:

> If you bought Altria in the last decade when the company had a single
> digit pe and at least a 7% dividend yield it happened twice. In 2000
> the stock more than doubled a year later and in 2003 the stock increased
> about 50% ina year. This is agreat entry price and a great stock.peace

Jan 05 02:57 PM

[overtaxed42...:]

I'd be careful here. With the Obama machine gearing up, expect the rise in corporate taxes. Thus lowering eps. Also expect less consumer spending on higher cost brands that PM produces. And if the dollar gains strength as it is currently doing, the exchange rate will be detrimental to the stocks price also.

Jan 20 01:25 PM

[overtaxed42...:]

This comes from PM's filing with the SEC. A quote from the CEO:
"The other major contributor to our 22% income rise was currency, which contributed $749 million through the end of September. This significant currency variance reflects favorable average exchange rates through September versus the prior year. Regretfully, what the Lord giveth, he taketh away and the US Dollar has enjoyed a significant reversal of fortune in the last couple of months given its relative safe haven status. This reversal, if sustained … and that is a big if … given the huge dual deficits that burden the US economy, will undoubtedly constitute a significant headwind to our reported results next year."

Jan 22 05:00 PM