- Rising input costs weigh on profit margins and lead companies to pass on costs to customers.
- Shortages of workers and goods caused by supply-chain issues pose problems for some firms in Q2.
- Goldman Sachs named 32 stocks with better-than-average profit margins that should keep rising.
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Threats like rising input costs and hot inflation aren’t as big of a deal for firms with high profit margins. A recent Goldman Sachs note spearheaded by Chief US Equity Strategist David Kostin listed 32 companies with strong profit margins that will weather what could be a stormy Q2 earnings season.
US stocks have slid this week as outstanding earnings reports fail to put investors at ease. Wall Street expects earnings to soar 61% year-over-year as companies crush comparisons from Q2 2020, when earnings fell 32% amidst pandemic-induced shutdowns and a sharp
Net profit margins will also increase by 2.56% from 2020 to 11.1%, per the Street’s consensus, though that would be down slightly from a record-high mark of 11.9% in Q1 2021, Kostin wrote.
Higher supply-side costs driven by shortages of goods and workers could weigh on firms’ bottom lines. Goldman expects companies to pass on costs to consumers through price hikes.
“Global shipping woes, raw material inflation, as well as acute shortages in both labor and semiconductors have combined to increase costs for companies across the economy,” the note read. “In the face of rising input costs, companies have been defending margins by raising prices and passing higher input costs to their customers.”
In this environment, quality companies with higher profit margins, stronger balance sheets, and higher returns on capital than peers should outperform, as they have since June, the note read.
“Investors have started to reward companies with attractive margin profiles,” Kostin wrote. “Our valuation model shows [that] profit margins are the second most important driver of company valuations today, behind only equity duration.”
Goldman Sachs listed 32 stocks that boast above-average net profit margins that grew at least 0.5% in 2020 and are also expected to expand margins by 0.5% in both 2021 and 2022. The median stock on the list has an expected net margin of 26% in 2021, double that of the S&P 500’s median stock, and should grow margins by 3.06% in the next two years, compared to a 1.56% median growth rate among S&P 500 stocks.
The names are listed below, along with ticker, market capitalization, expected 2021 net margin, expected margin growth in 2021 and 2022, and forward price-to-earnings ratio.