GASOLINE SAVINGS ARE GOING TO FUEL CONSUMER SPENDING, RIGHT?

There has been an expectation of higher consumer spending (70% of the economy) as the public puts their $30-50/week of gasoline savings to work at the mall (or online). Lots of investors and economists are scratching their heads as to why the fuel costs have not been reflected at restaurant and retail outlets. This is especially perplexing since household debt levels have come down materially over the last half dozen years, theoretically providing the consumer with more spending inclination. Forgotten in the discussion are the combination of higher health insurance premiums and especially the higher deductibles. If the family health premium is $500 higher annually, and the deductible is $2000-3000 higher, the typical family will be out of pocket by $2500 -3500 annually before insurance is effective. While not every family will experience illness, many will spend a material portion, and everyone will be worried about the possibility. It is therefore no wonder that the $1500-2500 per year of gasoline savings will not be frivolously spent. Relative to future consumer spending, gasoline prices are unlikely to once again come down a great deal, but out of pocket health care costs are likely to rise further. Should gasoline prices rebound upward, in the absence of lower health care costs, consumer spending will be that much more constrained.

You’ve Asked Rog:

It’s look like restaurant stocks are really weakening. Is there anything going on that I should know about?

Rog Answers:

A number of things come to mind. First, traffic and same store sales increases are hard to come by from everything I hear. We will know more specifics in early November when the public companies start to report. Secondly, it is clear to me that labor costs are increasing as a result of the speading higher minimum wage costs and the continuing increase in the cost of health care benefits. This has got to be affecting operating margins, especially with challenging  traffic trends. Again, we will have more data points in a few weeks. Lastly, the restaurant stocks were trading earlier this year way higher than a their historical range. Just one name that comes to mind ( a fine company, led by a great executive) is Popeye’s (PLKI), a solid 15-20% long term grower, was selling at almost 40x forward earnings. Even though it is six months later, and the stock is 15% lower, it still almost 30x forward earnings. Low interest rates and a tough economy drive investors to celebrate predictable growth but it’s “just chicken”.