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Inflation Is A Hot Topic This Corporate Earnings Season

Daniel Plainview

Updated: October 25, 2022

inflation under control
Editor’s Note:

EDITOR'S NOTE: Around two-thirds of all S&P companies who have reported Q3 results have mentioned inflation as a pressing matter. They comprise hundreds of companies across all eleven sectors of the economy. If you’re not entirely caught up with most economic reports, know that it’s important to understand the implications of the CPI and PPI. The PPI is predictive, in that higher manufacturing costs are likely to show up as a price increase for the products you buy. Another thing to consider is the possibility that higher prices might prompt companies to raise wages (to help incomes keep pace with inflation). The problem with this is that these very companies may be forced to raise their prices to compensate for higher wages, creating an inflationary spiral. The main point: inflation is eating into corporate earnings. This hints at the likelihood that inflation hasn’t yet peaked, and that higher prices are yet to come.

KEY POINTS
  • About two-thirds of companies in the S&P 500 that reported earnings in the first two weeks of the season (Oct. 10-21) had representatives mention inflation, according to a search of conference call transcripts by FactSet.
  • Included among those companies are PepsiCo, Citigroup and Abbott Laboratories.
  • “The environment clearly is still very inflationary with a lot of supply chain challenges across the industry,” said PepsiCo CEO Ramon Laguarta.

One thing is clear at the start of the corporate earnings season: Inflation remains a hot topic for companies.

About two-thirds of companies in the S&P 500 that reported earnings in the first two weeks of the season (Oct. 10-21) had representatives mention inflation, according to a search of conference call transcripts by FactSet. Included among those companies are PepsiCo, Citigroup and Abbott Laboratories.

“The environment clearly is still very inflationary with a lot of supply chain challenges across the industry,” said PepsiCo CEO Ramon Laguarta. The snack and beverage company beat analyst expectations for both revenue and earnings per share as its price hikes buoyed its bottom line, even as some units saw volume declines.

Recent economic data shows little sign of inflation letting up.

The consumer price index increased 0.4% in September, which was a hotter reading than the 0.3% expected by Dow Jones, according to the Bureau of Labor Statistics. It was at 0.6% without food and energy factored in, which was also above Dow Jones’ estimate of 0.4%.

The producer price index, which gauges wholesale prices, also rose 0.4% in September. That was similarly above the Dow Jones expectation of 0.2%.

Lingering inflation has led consumers to rethink expensive purchases as their spending power is squeezed and has also created higher costs for companies like Procter & Gamble. Last week the household goods maker of brands like Tide and Charmin posted quarterly results that narrowly outperformed analyst expectations.

Raw- and packaging-material costs inclusive of commodities and supply inflation have remained high since we gave our initial outlook for the year in late July,” Chief Financial Officer Andre Schulten said during Wednesday’s conference call. “Based on current spot prices and latest contracts, we now estimate a $2.4 billion after-tax headwind in fiscal 2023.”

The company was among a handful of multinationals that said inflation abroad was chomping at international bottom lines as well as in the U.S. Citigroup and Pool, which distributes pool supplies, both said inflation in Europe hurt their businesses in the previous quarter.

Pool said total construction volume would likely be down in 2022 compared to 2021, though it beat expectations for the quarter.

Inflation is also making it harder for some companies to fill positions. Human resources company Robert Half said the workforce remains tight, while Snap-On said wages had to continue growing to get skilled workers. To be sure, Union Pacific said crew availability continued to improve and HCA Healthcare said it could lean less on contract workers to fill voids.

This year’s inflationary pressure have led to multiple rate increases from the Federal Reserve. It is expected to keep hiking until the end of 2022, at least.

On the fiscal side, the government passed the Inflation Reduction Act earlier this year.

Multiple companies said the Inflation Reduction Act would likely help their outlook, with those who emphasize green energy poised to benefit from the legislation’s tax credits for alternative energy forms.

Electric vehicle maker Tesla said it was too early to predict specific impacts on demand, but they did expect to benefit from the legislation’s benefits for consumers who migrate away from gas-powered cars. The company beat earnings per share expectations for the third quarter but revenue came in lower than analysts anticipated.

How long will pressures last?

Predictions about how long these pressures will last varies with the executives being asked for their opinion.

“Inflation continues to be a stubborn force globally, though we’ve started to see some moderating impacts in certain areas of our businesses compared to earlier in the year,” Abbott CEO Robert Ford said Oct. 19. The science company beat expectations for the quarter with per-share earnings nearly 23% higher than expected.

Manufacturing company Dover also said inflation has come down compared to the past year and a half, specifically pointing to the company’s decreasing costs related to logistics and raw material. That view is in line with that of some economics experts, who said “soft” inflation gauges are falling faster than the main indicators the Fed favors like the consumer price index which can lag.

“Clearly, we have some caution in terms of what’s going to develop in the marketplace,” said Dover CEO Richard Tobin on Oct. 20. “I fundamentally disagree with what the Fed is doing now.”

Others weren’t as upbeat, though. Whirlpool and Tractor Supply Company both said inflation should persist at the current level for the first half of 2023 before cooling. Tractor Supply beat per-share earnings but missed on sales, while Whirlpool came in below expectations for per-share earnings by about 16%.

“Inflation remains persistent and elevated, and we anticipate this to continue well into 2023 with some moderation in the back half of 2023,” Tractor Supply CEO Harry Lawton said.

Originally published on CNBC.

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