10 Industries In Secular Decline

 At Gradient Analytics, we spend a significant amount of our time analyzing financial statements and looking for accounting irregularities (or shenanigans) and signs of misleading “financial engineering.” When we find a firm employing aggressive accounting tactics, we often notice that they operate in industries that are undergoing significant change or are in secular decline. This makes sense, considering that companies in such industries tend to exhibit declining top-and bottom-line growth rates. By applying aggressive accounting assumptions, management can temporarily juice both sales and earnings growth.

However, just because a company operates within an industry in secular decline does not necessarily mean it will struggle to grow. The stronger players often can accumulate greater market share and prosper, while the weaker players lose market share and fade away.

In this article, I provide a cursory overview of ten industries that we believe are in secular decline and opine on some of their constituents – highlighting a few that we think may thrive and a few that we think will struggle.  

Industries that we believe are in secular decline:

  1. Movie theaters
  2. Baby diapers
  3. Natural gas utilities
  4. Milk beverages
  5. Textbooks
  6. Bank branches
  7. On-premises IT infrastructure and services
  8. Set-top boxes (i.e., cable boxes)
  9. Life insurance
10. Automotive transmissions

Let’s briefly explore each individually.

1. Movie theaters:

Movie theaters have undoubtedly struggled following COVID-19 restrictions that kept doors closed to customers and pushed back the release dates of major films into 2021 and 2022. However, even before the pandemic, movie theater attendance had been trending down. According to the National Association of Theatre Owners (the other NATO), admissions into movie theaters in the U.S and Canada have been steadily declining over the last decade, as shown below in Chart 1. However, despite the decline in attendance, operators such as AMC Entertainment Holdings (AMC) and Cinemark Holdings (CNK) have reported annual YOY sales growth in almost every year between 2009 and 2019.

Chart 1. U.S. and Canada Movie Theater Admissions and Average Ticket Prices 2009-2019
(Admissions in millions)

Movie theater admissions and ticket prices

A driver of topline growth for AMC and CNK undoubtedly has been the rise in the average movie ticket price. For example, the average U.S. ticket price has increased 22% over the past decade, which has helped offset the 12% decline in attendance volumes over the same time period. Unfortunately, we believe that this trend ultimately is unsustainable since raising ticket prices likely will lead to a further decrease in attendance. Movie theater operators such as AMC and CNK likely will need to reposition operations to continue to grow their top line going forward. One approach has been to invest in luxury movie theaters, which supports higher ticket prices.

Notably, a firm like Barco N.V. (BAR:BR), which sells cinema projectors, is likely to struggle to grow as movie theater locations consolidate in response to declining attendance. (Note: Gradient has an active short thesis on Barco based on fundamental weakness and multiple earnings quality concerns detailed in our original coverage-initiation Alert and recent post-earnings Research Note, both of which are available to Gradient’s research subscribers.)

2. Baby diapers:

The U.S. has exhibited a long trend of declining births and fertility rates. As shown below in Chart 2, baby births declined 1.0% YOY in 2019, marking the fifth year in a row that baby births have declined on a YOY basis. This was also the lowest level of baby births since 1985. Moreover, the general fertility rate (number of births per 1,000 women aged 15-44) in the US declined 2.0% YOY to 58.3 births per 1,000 in 2019, a record low.

Chart 2. Live Births and General Fertility Rates: U.S. 1990-2019

Live births and fertility rates

The declining number of births in the U.S. also has steepened following the COVID-19 pandemic. Economists at the Brookings Institute estimated that there will be between 300,000 to 500,000 fewer baby births in 2021 (down about 8% YOY) due to the impact of the pandemic. The economic loss and general uncertainty will lead to a material decline in births, according to economists. Another study analyzed Google search trends for pregnancy-related terms such as “ClearBlue” (a pregnancy test), “ultrasound,” and “morning sickness” and found that these searches have all fallen since the pandemic began. Following this analysis, the authors project a staggering 15% decline in births in 2021.

We note that Kimberly-Clark Corporation (KMB), maker of Huggies Diapers, also anticipates births to decline in 2021 but at a slower rate than is forecasted by the aforementioned studies. Looking ahead, KMB likely will need to increase the prices of their baby-related products to offset the decline in infant births.

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Disclosure: At the time of this writing, the author held no positions in the securities mentioned.

Disclosure: Author has no positions in stocks or ETFs mentioned.

 
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