Investability bulletin 22/03/22: Supply Chain Reaction

Managing supply chain pressures is the corporate issue du jour

Photo by Mika Baumeister

FactSet searched for the term “supply chain” in the conference call transcripts of all the S&P 500 companies that conducted earnings conference calls from December 15th through March 14th. Of these, 358 mentioned the term during their earnings calls, well above the five-year average of 187. It was the second-highest number of companies citing “supply chain” on earnings calls going back to 2010 – the most was 362, which occurred in the previous quarter (Q3 2021).

So to a couple of bellwether stocks… 

Nike shrugged off supply troubles to grow North American sales by 9%. Shares rallied 6% in pre-mkt trading as the company seemed to show it can handle supply disruption and rising input costs. Although sales in China remain lower following the boycott of Western brands by consumers, the overall picture looks healthy. More direct-to-consumer sales is a big help. Digital sales in the last quarter rose 19% from the prior year, driven by 33% growth in North America. As a result, gross margins rose to 46.6% from 45.6% a year ago.  Earnings per share came in at $0.87 vs $0.71 expected on revenues of $10.87bn. Shares in UK trainer retailer JD Sports climbed approaching 3% in reaction.

Another UK retailer, Kingfisher, also seems to be shrugging off higher costs to deliver a record year of profit and revenue growth. LFL sales rose almost 10% and margins increased 30bps. And despite rising inflation pressures, cost-cutting efforts and higher sales volumes lifted adjusted pre-tax profits by over 20%. Again, more e-commerce sales are making the difference, with these up 171% from two years ago. Inflation was mentioned 26 times in the release. Shares can’t catch much of a break though, down 2% today and 18% YTD. Trades at a PE of 7…

Meanwhile bond markets are on the move as the US 10-yr jumped north of 2.3%, though stock markets are not looking too bothered right now. European bourses trade mildly higher this morning after a soft session in the US and mixed bag from Asia overnight. Banks, autos, insurance are leading the Stoxx 600, with healthcare the only sector in the red. Oil and gas stocks towards the lower end as oil prices lurched lower in early trade – Brent dropping from a high above $119 to a $114 handle in fairly short order. Unclear the reason, underlines the volatility and illiquidity in the market right now…open interest in WTI is at its lowest in seven years. 

Fed chair Jay Powell sounded the alarm on inflation, saying it’s ‘much too high’ and opening the door to more aggressive rate hikes. “We will take the necessary steps to ensure a return to price stability,” he said. “In particular, if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so. And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well.” 

The Fed seems to be converging on an idea: The Fed’s Bostic said he’s “not wedded to moving only 25”, while fellow policymaker Barkin said he’s “very open to half-point moves”. Another policymaker, Waller, said “the data is basically screaming at us to go 50”, and probably the most hawkish on the committee, James Bullard, said “50 [bps hike]… would have been a better decision”. The Fed is suddenly worried about the inflation that’s been building pressure for well over a year. Strong sense that they are out to crush inflation and hiking is going to accelerate. Last Thursday I noted that US 10s could jump to 2.5% quite quickly and we are well on our way to that already.

With all this Fed talk you have to look worryingly at growth stocks. ARKK fell almost 3% and NDX is not shaking the bear trend. The bubble is pricked. 

Ahead of the Spring Statement tomorrow, GBPUSD continues to trade around 1.3160, the odld zone of support from Dec ‘21. CFTC data showed net bearish bets on the pound rose by $1.3 billion to $2.6 billion, highest since the start of the year. UK gilt yields have risen to their highest in three years as global bond markets continued to sell off. Any war premium for bonds has been removed by the hawkishness of the Fed.

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