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 issue 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, as you can see below.

Zacks Investment ResearchImage Source: Zacks Investment Research

But this is expected to be nothing more than a temporary speed bump. This becomes clear in the annual margins picture seen below.

Zacks Investment ResearchImage Source: Zacks Investment Research

The chart below provides a big-picture view of earnings on a quarterly basis.

Zacks Investment ResearchImage Source: Zacks Investment Research

The chart below shows the overall earnings picture on an annual basis, with the growth momentum expected to continue.

Zacks Investment ResearchImage Source: Zacks Investment Research

We remain positive in our earnings outlook, as we see the overall growth picture steadily improving, as the near-term logistical issues get addressed.


Infrastructure Stock Boom to Sweep America

A massive push to rebuild the crumbling U.S. infrastructure will soon be underway. It’s bipartisan, urgent, and inevitable. Trillions will be spent. Fortunes will be made.

The only question is “Will you get into the right stocks early when their growth potential is greatest?”

Zacks has released a Special Report to help you do just that, and today it’s free. Discover 7 special companies that look to gain the most from construction and repair to roads, bridges, and buildings, plus cargo hauling and energy transformation on an almost unimaginable scale.

Download FREE: How to Profit from Trillions on Spending for Infrastructure >>

Click to get this free report

Amazon.com, Inc. (AMZN): Free Stock Analysis Report

Apple Inc. (AAPL): Free Stock Analysis Report

Brinker International, Inc. (EAT): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

US Markets

Latest Companies Videos

Brand Trust and Gen Z

Jun 23, 2022

Zacks

Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at www.zacks.com.

Learn More