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Ken Suchoski joins Alex Song on Recession-Proof this week to discuss the impact of inflation, which types of businesses will thrive in this environment and what your management team should be doing now.
Ken is the Equity Research Analyst at Autonomous Research, where he collaborates with companies like Visa, Mastercard, PayPal, Global Payments, Bill.com, FleetCor, WEX, nCino, and Western Union. Before Autonomous Research, Ken served as a Research Analyst for First Eagle Investments and Janney Montgomery Scott.
Ken and Alex discuss:
- The role of an equity research analyst
- Short-term and long-term macro trends
- What makes an effective management team
- Which businesses are better positioned to survive and thrive in an inflationary environment
Key Takeaways
- Regarding the macro environment, it's essential to separate what we're seeing in terms of current indicators versus what we might see in the future. In the near term, there are excess savings, wage growth remains robust, debt servicing for consumers remains in check, and credit volume growth continues to outpace debit volume growth. Overall, we are experiencing normalization of the shifts we saw during COVID-19. On the other hand, banks disagree over their economic outlooks, investors are concerned about the so-called “white-collar recession”, and that we may see a macro slow down over the long term.
“In this time of uncertainty, businesses need to put more of their spending under scrutiny. If you're facing inflationary pressures and your costs are going up, you need to be able to manage that.”
- Overall, inflation is bad for every company in the long run. But in the near term, it might bring benefits and opportunities for specific industries and businesses. For example, if you're in the business of processing payments, inflation might help you because just the ticket sizes get larger. These companies usually generate revenue as a percentage of the transaction value. So as the average transaction size increases due to inflation, if you're charging two percent per transaction, your revenues will increase as that transaction size increases. As a rule, companies with greater pricing power are better positioned to survive and thrive in an inflationary environment.
“Our view on inflation is that it's not good for any business. But payment companies are generally better positioned to face inflationary periods, at least when compared to companies that are outside of the financial services sector.”
- When looking at a business from the investor's perspective, you want a management team that will do the right thing in allocating the generated cash flow to high-return projects or maybe acquisitions if that makes sense. You also want a management team that you can trust and that foster an attractive culture. Regarding what a management team should be doing right now: cash preservation and expense management.
“So you have a business that is producing cash flow. The management team is responsible for being stewards of allocating that cash flow and the earnings that the business generates.”
Learn more about Ken:
- Ken on LinkedIn
Episode resources:
Check out the full transcript here.
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