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In an aerial view, shipping containers and a container ship are seen at the Port of Los Angeles on September 20, 2021 near Los Angeles, California.
Mario Tama / Getty Images
Businesses pay more for less. And that’s becoming a problem for stocks entering the fourth quarter of the year as bottlenecks persist and costs rise.
Exhibit A in the history of the supply chain is
FedEx
(symbol: FDX). The company released its first quarter numbers after Tuesday’s close. It missed its profit projections and lowered its profit forecast for the entire year, causing its stock to drop more than 4% in after-hours trading.
FedEx ended up reporting operating income of about $ 1.49 billion for its first fiscal quarter ended in August. It grossed $ 1.64 billion a year ago. Excluding the $ 450 inflation problem, operating income could have been $ 1.94 billion. Wall Street was forecasting $ 1.76 billion in profits. Additionally, the earnings per share forecast for the full year has been reduced to about $ 20.38, from $ 21 per share. This is not a good result.
For FedEx, work was the big deal. “First quarter operating results were negatively affected by an estimated increase in costs of $ 450 million year over year due to a tight labor market,” the press release read. company press release. Think about it.
FedEx is a canary in the coal mine for investors. The business is on an odd fiscal calendar. His year ends in May. This makes it one of the first companies to release numbers and project to 2022. The $ 450 million in manpower is a first quantification of the types of issues investors will hear about when the results come out. of the third quarter will begin to be published in October. .
But that’s only just beginning to quantify the problem. FedEx COO Rajesh Subramaniam explained on the company’s earnings conference call that labor shortages are also causing packages to be routed and processed further. Costs, as well as labor rates, are on the rise.
FedEx is not the only company facing these problems. Labor issues, leading to shortages for other businesses, result in higher prices for everything. The Bureau of Labor Statistics producer price index for intermediate goods rose 23% year-on-year in August. Intermediate goods are things bought and sold by businesses before being bought by end consumers. The BLS PPI for finished goods increased 10.5% year-on-year in August. When the prices of finished goods increase less than the prices of parts, profit margins are reduced.
Supply chain issues also affect sales. “It is difficult to get enough inventory to meet current demand, let alone start to establish inventory balances within the supply chain,” Joseph Massaro, chief financial officer of the auto parts supplier.
active
(APTV), said Tuesday at an investment conference. The auto industry has not been able to build enough cars to meet current demand.
The global auto industry has faced parts shortages all year round, and things are not improving. Chinese producer of electric vehicles
Li Auto
(LI) cut its delivery forecast for the third quarter on Monday. Li stock fell 7.5% on Monday, worse than the respective declines of 1.7% and 1.8% in the
S&P 500
and
Dow Jones Industrial Average
and the 3.9% drop in EV par
You’re here
(TSLA).
This is what investors will be facing in the coming months: more volatility. There will be more surprises, like those from FedEx and Li Auto, to come.
However, supply chain issues don’t have to kill the bull market. Part of the demand is not lost, it is simply shifted to future periods. And labor costs could normalize as more people get vaccinated and some pandemic-related unemployment benefits expire. Things can get better.
Right now, however, it is time for investors to give in. It’s going to be a bumpy race.
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