The Essentials are Getting Expensive – So What?
Great article over on the Atlantic regarding trends in costs for Americans. How much has health care increased? What has decreased? It got us thinking about what these trends mean in the valuation world.
As the chart below indicates, and as a lot of us feel in our wallets, things have been getting more expensive. What hasn’t been getting more expensive are in essence those items or services that can be outsourced.
And this makes sense, right? If we can take cost out of a product or service – be it through off shoring on technology advances or new methodologies, eventually some of that savings gets passed along to the consumer. (The exception: monopolies)
So how does this effect valuation? Well if we are taking the long view, valuation is enhanced in areas where we have a clear line of sight to a long term economic benefit stream. So in areas that aren’t threatened by margin compression and price reductions valuation is enhancecd.
Conversely if you are in an industry where there is a trend to margin compression and a race to the bottom in pricing, you have to continually sell more widgets to maintain both revenues and earnings.
Not sure about you, but I’m pretty certain which type of business I’d find more attractive to run. The one that has more long term stability and built in protections. Right?