Americans are paying higher prices for almost everything—which could spell bad news for many companies.
The producer price index, which measures the costs domestic producers pay for goods and services, climbed 9.6% year over year, according to the latest November reading. The consumer price index, which tracks the prices shoppers pay for products, increased 6.8% during the same period.
That means many producers were forced to absorb rising input costs themselves—which likely led to lower earnings and narrower profit margins.
Some companies are likely to perform better in an inflationary environment. Businesses with competitive edge and strong pricing power, for example, can pass rising costs to customers by raising prices. Others might be less affected by rising labor and material costs thanks to the type of products and services they sell.
Barron’s looked for the S&P 500 companies that managed to expand their profit margins—both net and gross—in the latest reported fiscal quarter, as compared with the same periods in 2020 and 2019. The 2019 comparison was included to make sure the higher margin isn’t the result of 2020’s abnormally bad numbers due to the Covid-19 pandemic. Firms with negative earnings in any of the three years were excluded from the list.
Among the group of nearly 100 stocks that have expanded margins, 11 are currently trading more than 20% below their 52-week highs as of Friday. That’s a sign that these names might have pulled back enough and are ready for a rebound, given their healthy profitability growth.
One of the stocks on the list, Under Armour (ticker: UAA), offers a good example. During the quarter that ended in September 2021, the sports apparel retailer grew its net sales by 8% from the year-ago period to reach $1.5 billion.
However, Under Armour’s net income has jumped to $113 million from $39 million last year. That means the company was able to significantly strengthen its profitability despite similar levels of consumer activity and revenue. Under Armour’s net margin has increased from 2.7% to 7.3% as a result, and its gross margin has increased from 48% to 51%. Notably, even when compared with 2019, margins have slightly improved, despite pandemic-related inflation pressure.
Fighting Inflation
These stocks have expanded their profit margins last year, but are trading at a discount from their 52-week highs.
| Company / Ticker | Sector | 2021 Q3 Net Margin | 2020 Q3 Net Margin | 2019 Q3 Net Margin | Current Price / 52W High | Price / Earnings |
|---|---|---|---|---|---|---|
| Charter Communications / CHTR | Telecom | 9.3 | 6.8 | 3.4 | 77% | 28.2 |
| DISH Network / DISH | Telecom | 12.5 | 11.1 | 11.2 | 70 | 8.6 |
| Leidos / LDOS | Industrials | 5.9 | 5.0 | 5.7 | 80 | 13.7 |
| Lumen Technologies / LUMN | Telecom | 11.1 | 7.1 | 5.6 | 78 | 6.7 |
| Mohawk Industries / MHK | Materials | 9.6 | 8.0 | 6.2 | 78 | 12.2 |
| Netflix / NFLX | Technology | 19.4 | 12.3 | 12.7 | 79 | 51.6 |
| PTC / PTC | Technology | 60.9 | 13.7 | 2.9 | 76% | 27.2 |
| Qorvo / QRVO | Technology | 25.4 | 12.9 | 10.3 | 79 | 13.3 |
| AT&T / T | Telecom | 14.8 | 6.7 | 8.3 | 77 | 7.7 |
| Under Armour / UAA | Consumer Cyclicals | 7.3 | 2.7 | 7.2 | 76 | 27.4 |
| Viatris / VTRS | Healthcare | 6.9 | 6.2 | 6.4 | 77 | 3.9 |
Source: FactSet
Other companies on the list tend to be less affected by the rising input costs to start with. That’s because their products or services mostly rely on existing infrastructure, intellectual properties, or platforms.
Examples include telecommunication giants AT&T
(T), Charter Communications (CHTR), and Dish Network (DISH). They’re joined by video-streaming platform Netflix (NFLX) and software company PTC (PTC), as well as Leidos (LDOS), Lumen Technologies (LUMN), Mohawk Industries (MHK), Qorvo (QRVO), and Viatris (VTRS).
Write to Evie Liu at [email protected]
