Companies set to kick off the third-quarter earnings season in the coming weeks include S&P 500 heavyweights Johnson & Johnson and Netflix Inc., as well as Domino’s Pizza Inc. and Fastenal Co. Here’s what shareholders need to know:
Supply chains are still backed up. Chief executives were optimistic heading into summer that bottlenecks and soaring freight rates would ease. Instead, they became much worse, putting logistics operations — normally the quiet workhorse of corporate America — front and center for earnings calls. Some companies are already revealing their hacks. Honeywell International Inc. has rerouted ships to less-clogged ports, while also redesigning certain products to adapt to the semiconductor shortage. Unable to secure enough of the standard 20-foot shipping containers, Coca-Cola Co. is importing ingredients on vessels normally used to haul bulk commodities such as coal. And Home Depot Inc. and Walmart Inc. have decided to charter their own boats.
Even so, paint giants PPG Industries Inc. and Sherwin-Williams Co., electrical-equipment maker Eaton Corp. and lock maker Allegion Plc have warned that they will have less revenue this quarter because of difficulty securing parts and materials. There’s at least a potential glimmer of hope: Drewry data show the rate for a 40-foot container traveling from Shanghai to Los Angeles dropped last week by almost $1,000, or 8.2%, the steepest weekly decline since March 2020.
Is demand the new worry? Throughout the supply-chain meltdown, strong customer demand has been a consolation. The big question is, what happens if that starts to give way? While slower growth might alleviate some freight stress, it could also spark a massive selloff. In late September, retail stocks dropped sharply after Bed Bath & Beyond Inc. suggested spending on home furnishings was easing. Watch for any signs of a broader pullback in demand. On Sunday, economists at Goldman Sachs Group Inc. lowered their forecasts for U.S. growth this year and next because a more delayed recovery in consumer spending is now expected, due to Covid-19 and continued remote work.
How high can you go? Consumer-products makers, fast-food chains and manufacturers have aggressively — and successfully — raised prices to mitigate any drag on profits. But with some companies now on their nth round of increases, customers may start to fight back against the inflation trend. Indeed, Wolfe Research’s latest survey of industrial distributors suggests some customers are starting to rethink their willingness to pay any price to get products. If businesses can’t keep charging more to offset freight and labor costs, their profit margins are bound to take a hit.
Not all supply-chain pressures involve trucks and boats, though. Streaming-TV services such as Netflix and Walt Disney Co.’s Disney+ have been lifting subscription fees to help fund an insatiable appetite for new programming. But in recent months there’s been a push and pull between streaming and travel, two sectors at opposing ends of the post-Covid behavior spectrum. After a summer slowdown in video sign-ups amid a travel recovery, it’s possible that persistent Covid-19 and colder weather will shift pricing power back in streamers’ favor.
Desperate measures. Don’t be surprised to see big advertising cutbacks to offset cost inflation elsewhere. If demand holds up in certain areas and products remain in short supply, there wouldn’t seem to be as much need to buy pricey television ad time or other forms of marketing. That might be short-sighted, but not as bad as slashing research and development. Packaged-food companies such as Kraft Heinz Co. have done that in the past in their ruthless fight for profit growth, but later found themselves ill-prepared for shifting food trends. Despite the well-advertised shortages, third-quarter profit estimates for S&P 500 index members have been rising, perhaps implying that analysts are banking on a healthy degree of financial engineering.
Help wanted. As of August, there were 10.4 million unfilled jobs across the U.S. economy. That’s only a modest improvement from July’s record high. September payroll data also indicated sluggish hiring amid the delta spread and lingering child-care challenges. Smaller companies appear to have the toughest time finding workers. “It’s been more of an issue for a number of our suppliers,” Caterpillar Inc. CEO Jim Umpleby said in a recent interview with Bloomberg News. But the interconnectedness of the manufacturing supply chain means that hiring is everyone’s problem.
Learning to deal. It’s possible that logistics obstacles will motivate some strained importers to turn to mergers and shipping alliances. Mergers-and-acquisitions volume among American companies this year is already on track to surpass the record set in 2015. The final three months of the year may yield still more activity, as companies position for megatrends such as software adoption, electrification and potential government infrastructure spending. The recent dip in the stock market may also prompt share repurchases.
In any case, it makes sense to expect companies to tinker with costs and prices as profit margins become an especially complex equation.
(Updated to include August jobs data in third-to-last paragraph.)
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Opinion columnist covering the business of entertainment and telecommunications, as well as broader deals. She previously wrote an M&A column for Bloomberg News.
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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