Supply Chain Chaos, Surging Costs Set to Plague Europe’s Profits

This content was published on October 17, 2021 - 06:00

(Bloomberg) --

Cost pressures, supply-chain chaos and a reopening letdown are set to plague Europe’s third-quarter earnings season, setting investors up for more disappointment than elation.

While strong numbers from behemoths like LVMH and SAP SE reassured European stock investors last week, further good news may be needed to keep the rally alive. Rising inflation and a stalling global recovery pose a challenge to further market gains.

“We expect fewer positive earnings surprises, more cautious corporate guidance and less earnings upgrades by analysts,” said Robert Greil, chief strategist at German private bank Merck Finck.

Here’s what investors are going to be watching as companies roll out their results: 

Logistical Nightmares

Pandemic-related chaos, post-Brexit customs checks and a shortage of truck drivers have wreaked havoc on supply chains. 

Clothing companies have been sounding the alarm ahead of the all-important holiday season, with online retailer Asos Plc warning that supply-chain problems are set to hit profit, while Hennes & Mauritz AB and Boohoo Group Plc have flagged delivery delays. Asos and Boohoo shares plunged after the announcements.

“We expect companies to struggle with supply constraints and rising input prices,” said Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International.

Stocks to watch include: Sportswear retailers Puma SE (earnings due Oct. 27) and Adidas AG (Nov. 10), online retailer Zalando SE (Nov. 3), shipping firm A.P. Moller-Maersk A/S (Nov. 2), industrial group Siemens AG (Nov. 11).

Rising Costs

Costs have been climbing for companies, a product of supply bottlenecks, surging commodity prices and a shortage of workers. Investors will be watching closely which firms have to swallow rising prices and which are able to pass them on to customers.

“Special attention must be paid to the impact that logistical problems in supply chains, rising energy costs and upward pressure on labor costs may have on results,” said Jose Antonio Montero de Espinosa, head of European equities at Santander Asset Management. “During the third quarter we have witnessed one of the periods with the greatest increase in inflation expectations in Europe.”

Energy producers could be natural beneficiaries. The Stoxx 600 Energy Index is up 19% over the past three months and is the top-performing sector in Europe. Earnings growth estimates for the sector have accelerated over the past few weeks as oil and gas prices have soared.

Stocks to watch include: Dairy-products maker Danone SA (Oct. 19), fertilizer producer Yara International ASA (Oct. 20), household-products company Reckitt Benckiser Group Plc (Oct. 26), brewer Anheuser-Busch InBev SA (Oct. 28), chemicals maker Solvay SA (Oct. 28), oil majors Royal Dutch Shell Plc (Oct. 28), TotalEnergies SE (Oct. 28) and BP Plc (Nov. 2).

Chip Crunch

The lockdowns forced many people to conduct their lives in the digital realm, which boosted demand for gadgets. Consequently, demand for the chips that power these devices rocketed, hitting automakers to smartphone giants like Apple Inc.

The chip situation doesn’t look set to ease any time soon, judging by the early warning signs from the automotive sector. Parts supplier Faurecia SA and truck manufacturer Traton SE cut forecasts last month, while Volkswagen AG said that it faces a large order backlog due to a lack of chips.

However, the chipmakers themselves could benefit. A recent update from Taiwan Semiconductor Manufacturing Co. showed that demand remains robust, with the Asian bellwether’s projections for the fourth quarter beating some analysts’ estimates.

Stocks to watch include: Semiconductor-equipment maker ASML Holding NV (Oct. 20), auto-chip suppliers STMicroelectronics NV (Oct. 28) and Infineon Technologies AG (Nov. 10), carmakers Volkswagen AG (Oct. 28) and Stellantis NV (Oct. 28)

READ: For Tech With Price Power, Inflation Is Good News: Taking Stock

Reopening Letdown

It’s been reality check time for companies that got a boost during the lockdowns, now that restrictions have eased. Remote software maker TeamViewer AG plunged 25% in the space of one day after cutting forecasts due to weaker demand from business customers. Online food delivery company Just Eat NV was another casualty, dropping after posting a slowdown in order growth.

“The market will be more demanding with those sectors that have performed very positively this year,” said Cristina Benito, head of equities for discretionary portfolios at Mapfre Asset Management.

Stocks to watch include: Food-delivery firm Deliveroo Plc (Oct. 20), computer-hardware maker Logitech International SA (Oct. 26), meal-kit maker HelloFresh SE (Nov. 2), mobile-messaging software maker Sinch (Nov. 2).

READ: TeamViewer Warning a Wake-Up Call for Europe’s Lockdown Darlings

Overall, earnings expectations for the third quarter are high, with analysts predicting about 60% growth for companies in the Stoxx 600. Still, the economic backdrop has become less favorable and analysts are slowing the pace at which they’re raising profit estimates. 

“We think the rebound in Stoxx 600 EPS has largely run its course, with our macro projections consistent with only marginal further upside by early next year,” Bank of America Corp. strategist Milla Savova said in emailed comments.

©2021 Bloomberg L.P.

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