A pattern has developed with first quarter earnings. Supply-chain issues are trumping strong demand and solid bottom line numbers. That trend doesn’t bode well for stocks in the coming couple of quarters.
Companies, particularly industrial companies, are beating earnings estimates citing strong demand along with ongoing supply chain shortages, such as a lack of semiconductors. Those supply chain snarls are resulting in higher costs and keeping a lid on full year 2022 financial forecasts. Companies just aren’t willing to go out on a limb and project supply chain improvement yet.
“People talk about a golden screw,” explains productivity hardware and software provider Zebra Technologies CEO Anders Gustafsson. Companies can have 99 out of 100 components to finish a product, but the one shortage stops production. Semiconductors are Zebra’s golden screws these days.
We “totally underestimated the length and depth of the semiconductor issue,” adds Gustafsson. “It’s not easy to get a clearer picture of what’s going on.”
That dynamic kept a lid on Zebra’s guidance. The company reported better than expected earnings Tuesday morning, but gave second quarter guidance that came in below analyst projections.
That conservatism, driven by a lack of golden screws, is weighing on Zebra stock. Shares are off about 3.8% on Tuesday. The S&P 500 is up 0.3% and the Dow Jones Industrial Average is flat.
That reaction looks typical. Roughly half of the industrial companies in the S&P 500 have reported first quarter numbers so far. Almost 80% have beaten bottom line estimates. The average earnings “beat” has been roughly 10%. (That excludes Boeing (BA) which had a particularly large earnings miss.) The average stock price reaction, again excluding Boeing,
is down about 0.5% the trading day following earnings.
DuPont de Nemours (DD) is another Tuesday example. The company reported better than expected earnings but maintained full year guidance, citing supply chain struggles and Covid’s reemergence in China as two reasons for conservatism.
DuPont shares started the day lower, but have clawed their way back and are up about 0.4%.
“Several multi-industry companies …highlighted similar China shutdown impacts,” wrote Credit Suisse analyst John Walsh in a report reflecting on supply chain woes. Carrier Global (CARR), 3M (MMM), Fortive (FTV) and Honeywell International (HON) are four he referenced.
On average, that quartet fell about 0.4% after earnings. All four beat expectations.
Looking ahead, investors have a choice. They can buy the dip believing that demand will stay strong. Or they can trim positions and wait for supply chain clarity.
For now they are selling. It’s difficult to see what companies could say to change their minds during the rest of first quarter earnings season.
Companies, for their parts, are doing what they can to manage through supply-chain problems. Zebra’s Gustafsson says his company is designing more flexibility into its products—so it can flip between different kinds of chips depending on what’s available.
Zebra is also reducing its dependence on China. Today, less than half its manufactured products come from China. A few years back, Gustafsson says the number was more than 90%.
Write to Al Root at [email protected]
Credit: www.marketwatch.com /