Supply Chain Constraints Are Easing. 5 Stocks That Should Benefit.

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Global supply chain bottlenecks are beginning to ease, which will benefit many stocks.

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Last year a boom in economic demand and economic stimulus caught companies off guard, leaving them unable to expand production capacity to meet demand. Now, signs are emerging that supply is finally picking up.

This week, the Institute for Supply Management’s manufacturing index showed that the price paid index fell to 68 in December from 82 the previous month. This means components are becoming more available for companies to buy, which is driving down the prices of those parts. According to Wolfe Research, shipping container prices have fallen by more than 50% since the peak of 2021, as measured by the Composite Container Rate Index. It also indicates that goods are becoming more available for transport and sale.

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“Supply-chain pressures can lead to longer delivery times and rising prices,” Citigroup economist Andrew Hollenhorst recently wrote.

As firms can once again access the parts and supplies they need to meet demand, this can put them back on track toward meeting their sales goals. Their profits should generally improve, especially as their costs increase gradually.

The stocks that should benefit the most from supply chain improvements belong to goods-producing companies that rely on buying parts to make and sell their products—as well as to transport goods. Here are five stocks on Wolfe Research’s list of direct supply chain beneficiaries. Four out of five stocks have seen gains in the past two months, as the supply chain shows signs of recovery. Some of his earnings estimates have also gone up.

General Motors

General Motors (ticker: GM) said at the Credit Suisse industrial conference in early December that the supply crunch had “stagnated” and should improve during the year. Earnings estimates for the auto maker have already started to rise. Since late November — when many companies begin to say supply conditions are improving — analysts’ 2022 earnings per share forecast are up a touch, but 2023 estimates are up 2%, according to FactSet. The stock has risen 15% since the start of November, but with annual EPS growth expected to average 8% over the next two years, the stock could continue to rise — especially if profit expectations keep improving.

Active

Aptiv (APTV), a $47 billion auto parts maker, said in November that supply and production volumes should increase in the fourth quarter compared to the third quarter. Since the beginning of November, the 2023 EPS is projected to rise 0.5%. Friday’s broad market sell-off put the stock in a modest loss for the period, but it could present a buying opportunity with more room for further gains.

Stanley Black & Decker

Stanley Black & Decker (SWK) said at the Baird Global Industrials Conference on November 10 that, whatever happens with shortages and costs, the company is raising prices to protect its profit margins. The company’s 2023 earnings per share forecast is up 1.4% since early November, while the stock is up 5%.

union pacific

Union Pacific (UNP) told the Baird conference that “by next year, I think”. [supply chain] The company’s 2023 EPS estimate is 0.7% just ahead of the Baird conference, as management said supply recovery would be slow. The stock is up 6%.

csx

Rail transport peer CSX told the Baird conference that it too sees an improvement in supply soon. Analysts’ profit forecasts are essentially flat at first, although the stock is up 4%, suggesting the situation may improve soon.

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