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(Bloomberg) – Reopening demand and abandoned containers have created bottlenecks in supply chains just as the holiday shopping season kicks off in North America. It also leads to downward revisions to analysts’ estimates for the next earnings season.
Few people expect supply grunts to end this year as an energy crisis stokes inflation fears. Caution is required in the semiconductor, retail and commodity industries.
“Supply chain problems will persist, causing dramatically higher prices and major upheaval in parts of markets that no one expects,†said George Ball, chairman of the Houston-based investment firm. Sanders Morris Harris. “Almost all segments of the economy that are not purely service or technology driven will be struggling with supply chain issues for a long time. “
The many reasons why global supply chains have become so hassled
Here are some of the challenges and opportunities identified by investors for key sectors ahead of the earnings season:
Semi-snags
For the semiconductor industry, more capacity is expected to emerge only towards the end of 2022 due to plant closures and longer delivery times. An electricity crisis in China could also worsen the situation by closing factories.
However, with the reopening of hubs such as Malaysia, the pricing power of some companies could weaken, especially at a time when the costs of materials such as silicon are skyrocketing.
DRAM and NAND chip prices already appear to be peaking, and 12-month earnings estimates for chipmaking giants Samsung Electronics Ltd., Micron Technology Inc. and Intel Corp. have fluctuated or fallen over the past two months. Stocks are down about 20% or more from recent highs.
“While many of them have seen record earnings increases, stocks have not followed suit,†said Christopher Rolland, analyst at Susquehanna. “It tells me that at this point some of that dismay is spilling over into stocks more broadly.”
The world is running out of computer chips. Here’s why: QuickTake
Automatic woes
Chip shortages are also behind the estimated $ 210 billion in lost sales for automakers this year. Many reported a drop in third-quarter revenues, made worse by traffic jams and port congestion. However, with the industry’s problems well documented, some analysts see most of the downsides already addressed.
“We consider the third quarter to be probably the trough in terms of automotive production” in the United States, although there may be multiple cuts to forecasts from suppliers, analysts at Morgan Stanley wrote on Wednesday, including Adam Jonas. “But the production cuts seem well telegraphed, so don’t be surprised to see investors buying the 3Q chip drop.”
The MSCI AC World Automobiles & Components Index has climbed to a relative seven-month high against the overall market since late August.
Automakers such as Tesla Inc. and Toyota Motor Corp. appear to be handling shortages better than others, with the Japanese automaker reporting a 1.4% increase in sales in the last quarter.
“Toyota has handled its chip sourcing very well so far,†as they approached supplier relationships differently after an earthquake earlier this year halted production, said Tineke Frikkee, head of UK equity research at Waverton Investment Management.
The wait for semiconductors becomes worrisome for automakers
Retail problem
A 65% drop in Bed Bath & Beyond Inc. shares since early June illustrates the problems facing retailers around the world, with multiple bottlenecks in their supply chains, just as they have to source for the most important time of the year. One industry indicator lags the broader market by more than seven percentage points this semester as companies cut their sales and profitability forecasts.
The challenges will have a “modest” impact on third quarter margins and will have a larger effect in the next one, which captures the holiday season, said Cristina Fernandez, analyst at Telsey Advisory Group.
Plant closures make matters worse. Nike Inc. lowered its sales forecast in late September due to shutdowns in Vietnam, where tens of thousands of workers are now leaving the core of the factory. Deckers Outdoor Corp., Skechers USA Inc., Adidas AG and Under Armor Inc. also have at least a quarter of their production in Vietnam, according to Wedbush Securities analyst Tom Nikic.
“That said, the most exposed stocks have fallen by around 20% on average since mid-August, so we think investors have digested most of these issues,†Nikic wrote in a note Monday.
Crude pain
What worsens margins is the shortage of supply in the raw materials sector, pushing up raw material costs even further for companies already facing logistics challenges.
“The next disruption in supply and demand is on the energy front,” said Zhikai Chen, head of Asian equities at BNP Paribas Asset Management. “We could see other supply problems if energy rationing were to become widespread.”
Citigroup’s Global Earnings Revision Index – a global measure of analysts’ improvements minus downgrades to earnings expectations – is slumping into negative territory after hitting a record high in May.
Cotton soared by nearly a new decade on Thursday, as decarbonization policies in China and India led to an acute coal crisis and natural gas prices in Europe soar.
Yet energy shortages and high oil prices are expected to be positive for green energy producers, electric vehicles, the battery industry and the entire green energy supply chain, Willem said. Sels, Director of Private Banking Investments and Wealth Management at HSBC Holdings Plc.
Not spared
Industrial and construction companies are expected to warn of supply chain issues as they begin reporting third quarter results later this month. Supermarkets, consumer staples and e-commerce businesses are facing a shortage of truck drivers in some parts of the world.
And shippers still face a shortage of freight containers in the right place for the right price.
“The industrial at large, the food sector and the construction industry are largely unscathed and are vulnerable to further corrections to reflect the risks,†said Sanders Morris Harris’s Ball.
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