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For Immediate Release
Chicago, IL – November 18, 2021 – Zacks Director of Research Sheraz Mian says, “While some unfavorable cost trends may not have had as much negative impact on earnings as many had feared ahead of the start of the Q3 reporting cycle, they still remain a risk to long-term earnings.“
Breaking Down the Outlook for Margins
Note: The following is an excerpt from this week’s Earnings Trends report. You can access the full report that contains detailed historical actual and estimates for the current and following periods, please click here>>>
The market has been focused on the rising cost of inputs and labor and other supply chain issues for the last few months. There was tangible nervousness in the market ahead of the start of the Q3 earnings season that these headwinds will start weighing on corporate profits through compressed margins.
We have seen some of that this earnings season, with companies like Brinker International EAT struggling to effectively deal with higher input and labor costs. Even mighty Apple AAPL and Amazon AMZN came up short in their quarterly reports as a result of these developments. But many other companies have been able to pass on higher costs to the end consumer.
Higher expenses prompted Amazon to cut 2021 Q4 guidance, with the company outlining $6 billion in incremental higher outlays, of which $2 billion was on account of labor cost inflation. Supply-chain issues were behind Apple’s revenue miss, with the logistical challenge shaving an estimated $6 billion from the company’s Q3 top line.
While these unfavorable cost trends may not have had as much negative impact on earnings as many had feared ahead of the start of the Q3 reporting cycle, they still remain a risk to long-term earnings trends. In fact, a number of sectors where the margin cushion is already fairly thin, appear to be struggling with these trends.
A notable sector suffering such a margin squeeze in the ongoing Q3 reporting cycle is Consumer Staples whose Q3 earnings growth of +5.9% on +14.0% includes a 110 basis-point net margin contraction. The Utilities, Autos, Retail and Construction sectors are also suffering margin squeezes, though relatively less pronounced compared to Consumer Staples.
Margin expectations embedded in current consensus earnings and revenue estimates for the coming periods suggest some pressures.
But this is expected to be nothing more than a temporary speed bump. This becomes clear in the annual margins picture.
We remain positive in our earnings outlook, as we see the overall growth picture steadily improving, as the near-term logistical issues get addressed.
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