(April 6/ 2017)
Europe’s Pulling Ahead Of The US?
Influential surveys of business activity on both sides of the Atlantic were released on Wednesday! They showed that the eurozone economy continues to pick up its pace while America’s momentum may be fading. The eurozone’s economy has significantly picked up over the past six months or so – Wednesday’s announcement suggests that business activity is now growing at its fastest pace in six years. Meanwhile in the US, economic growth has also been strong over the past six months (in fact, some signs suggested it was much stronger than Europe’s a few months ago), but according to the data released on Wednesday, activity in March grew at a notably slower pace.
What Does This Mean?
For markets: The eurozone’s growth is getting investors’ attention.
While surveys like the ones released on Wednesday don’t tell the whole story (it takes lots more time and data to do that), the contrast between the two reports is further evidence that Europe’s economic growth is on the up. Typically, international investors move their money into regions where growth is good (since an uptick in economic activity tends to be good for companies’ profits and hence their stocks). So, if signs persist that the eurozone’s growth is picking up while America’s is moderating, expect to see more investors shift towards Europe, as some have already done.
The bigger picture: There is a disconnect developing between “survey” data and data on actual economic activity.
Economists usually talk about two major types of data: data that comes from stuff like sentiment surveys (called “soft” data since it’s less certain) and data that measures discrete quantities like employment and business spending (called “hard” data). The soft data has, for months, suggested that the US economy is picking up sharply. However, this hasn’t (yet) fed through into the hard data. Soft data has historically foreshadowed hard data, so we should see those figures pick up soon – but some economists are doubtful.
European Investor Grabs US Bakery-Café
American “fast-casual” restaurant Panera Bread is being purchased by a big, privately-owned European investment company for $7 billion – about 20% more than it was worth before it received the purchasing offer!
What Does This Mean?
The acquirer, JAB Holdings, already owns a number of fast-casual restaurants, including Peet’s Coffee and Einstein Bagels. Despite JAB’s European base, it’s been increasingly focused on buying up American restaurants and food companies, including donut chain Krispy Kreme and coffee maker Keurig.
JAB typically allows the management teams of companies in its portfolio to operate their own show. It seems like that will be the case with Panera, although investors pointed to the possibility of Panera working with JAB’s coffee brands to sell more coffee – an area where it currently lags behind competitors.
For markets: Panera has successfully pioneered a tech-driven restaurant experience.
Back in 2014, Panera launched a new strategy it dubbed Panera 2.0, which involved a tech-enhanced dining experience (e.g. ordering from a mobile app). Its efforts were not an immediate success: it struggled to transition for over a year and its stock performed very poorly (Starbucks is experiencing similar troubles now with its mobile ordering rollout). But Panera eventually optimized its digital processes and, over the past 18 months or so, its sales growth has improved significantly and its stock price has hit an all-time high (even before JAB’s acquisition). JAB may look to implement the lessons Panera has learned into its other chains.
The bigger picture: Panera’s CEO says it’s much better to be a private company than a publicly traded one.
Since JAB is a private company, its takeover of Panera means Panera’s stock will no longer be available for public purchase. Panera’s CEO sees this as a huge advantage: he says that public markets have become way too focused on the short-term (e.g. quarterly sales), which detracts from building quality businesses over the long-term.
Tesla competing with Ford?
Some of my clients have asked me if its really possible for Tesla to be worth more than Ford. It seems crazy that a company with billions of dollars in revenue is worth less than a company that is stoked about delivering 25k cars. Let me explain.
Stock prices reflect investors’ expectations of a company’s future return to its shareholders. Clearly, plenty of investors believe that Tesla will, eventually, offer very substantial returns; the fact it’s producing so few cars right now is not particularly relevant. What is relevant is its ability to produce cars in the future at a reasonable cost and sell them for a profit (and, perhaps, sell other products like solar panels and batteries). Tesla’s current value may be attractive or obscene, depending on your viewpoint, but it’s an accurate representation of what investors, at the moment, feel about the company’s prospects.
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