Monday, February 14, 2011

Threat Builds on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Margins

Threat Builds on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Margins

By JONATHAN CHENG

This earnings season has seen a much-welcomed return to revenue growth, giving investors anocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r reason to push stocks to two-year highs.

But beneath cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 surface lurks a fresh worry: For many companies, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 cost of raw materials is rising at a faster pace than revenue. Blame it on soaring prices of everything from cotton to copper and corn. That has squeezed profit margins more markedly than many analysts anticipated—and is serving as a worrying sign for future earnings.


Bloomberg News

Harvested corn is loaded onto a truck in Ines Indart, Agentina, on Monday, April 5, 2010. Before April 20, corn declined 14 percent this year on forecasts for production to rise in Brazil and Argentina, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 biggest exporters behind cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 U.S. Photographer: Diego Giudice/Bloomberg
.Procter & Gamble, Ford Motor and Kraft Foods are among dozens of companies that reported lower profit margins for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 fourth quarter of 2010 compared with cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 third quarter. Their stocks were punished by investors, even as cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 companies' profit and revenue exceeded analyst forecasts. The cool reception stood in contrast to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 general optimism among investors that has helped cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Dow Jones Industrial Average to gain about 6% this year.

About three-quarters of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 companies in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Standard & Poor's 500-stock index have reported cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir earnings so far. Some 25% of those companies have posted lower margins in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 latest quarter, according to Morgan Stanley. S&P says operating margins for S&P 500 companies in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 latest quarter have come in at 8.69%, down from margins of 8.95% for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 S&P 500 in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 third quarter.

"I think this quarter was a wake-up call. We're seeing cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se stocks get hit on margins and sell off dramatically," said Erin Browne, director of global macro trading at Citigroup. "It's definitely picking up steam and becoming much more on cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 tops of investors' minds, and it's only going to continue as we move through 2011."

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.While some of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se costs can be passed on to customers, many companies have been unable to increase cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir own prices. The economic recovery is just gaining steam, unemployment remains high, and consumers are keeping a tight rein on spending.

Some worry that many analysts aren't taking cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 lower margins into account and are overestimating future profit margins. Adam Parker, Morgan Stanley's chief U.S. equity strategist, says consensus earnings estimates for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 rest of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 year imply that analysts continue to see margins expanding. That leaves plenty of room for disappointment if rising commodity prices bite deeply into companies' margins.

"Some analysts may be guilty of 'over-extrapolating' cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 recent margin improvements into cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir forward outlooks," and companies that fail to meet cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se heightened expectations may find cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365mselves punished by cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 market, Mr. Parker warned in a recent note to clients.

Kraft reported a 30% rise in revenue on Thursday. But cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 company said higher costs for meat, packaging and ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r raw materials sliced $500 million from net income, which cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 company reported at $540 million. The shares fell about 2% after cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 earnings were released. Procter & Gamble blamed higher commodity prices for crimping margins and said higher costs will lower annual earnings by about $1 billion. Since its earnings on Jan. 27, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 shares are down 2.1%, compared with a gain in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 S&P 500 of 2.5%. Ford shares are down 13% since Jan. 28, when cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 auto maker reported that rising costs of commodities such as steel and oil helped drag down its fourth-quarter profit.

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Ford Motor is among dozens of companies that reported lower profit margins for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 fourth quarter of 2010.
.Companies that are dependent on raw materials to produce cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir goods are going to feel cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 biggest pinch, like Procter & Gamble and Ford, said Charles Blood, market strategist at Brown Brocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365rs Harriman. But energy and materials companies are benefiting.

Citigroup's Ms. Browne recommends investors buy energy and agricultural stocks that benefit from higher commodity prices. Among her recommendations are Exxon Mobil, Peabody Energy and Monsanto. She says investors should avoid—or even bet against—consumer staples and consumer discretionary stocks that have to absorb or can't pass along cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365se higher input costs in slack consumer times. On her list: General Mills, Kimberly-Clark and Kraft. Ms. Browne said that while cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365me began to emerge in third-quarter earnings, "concern regarding input costs picked up materially during fourth-quarter earnings" as more and more companies reported lower margins.

The pinched margins put a damper on an earnings season that has finally delivered on revenues, which have come in much stronger than analysts have expected, in part because demand picked up faster than anticipated.

During cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 downturn, U.S. companies aggressively cut costs and improved productivity, allowing many of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365m to churn out profits even as cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 weak economy kept sales muted. But investors were worried that cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 cost-cutting would have its limits, and that longer-term growth could really only be sustained by revenue growth.

According to Brown Brocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365rs Harriman, 71% of S&P 500 companies reporting so far have beaten revenue expectations this earnings season, compared with cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 usual rate of about 60%. Revenue has grown an average of 9.8% in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 fourth quarter, significantly outpacing estimates of 3.8% growth.

"It tells me that end demand is stronger than what analysts had expected, and that's a very healthy sign that cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365re's more to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 profits recovery than just cost-cutting," says Priya Hariani, U.S. equity strategist with Bank of America Merrill Lynch. Ms. Hariani says she is unfazed by cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 shrinking margins, adding that worries are being stoked by "a handful of companies making headlines." She says current margins are sustainable. Interest rates are low, as are corporate borrowings and corporate-tax rates, she says.

While wages have started rising—up 0.4% in January, according to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Labor Department—cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365y remain low, she notes. And large swaths of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 S&P 500 are commodity producers, which benefit as commodity prices rise.

"There are some pockets of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 S&P 500 that get pressured, including retailers and food-product companies, but net-net, S&P 500 commodity input costs are low," she says. "What I think this will do is, you won't see cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 same rapid pace of margin expansion, but it doesn't mean we'll see any meaningful margin contraction."

Goodyear Tire & Rubber still managed to please investors worried about profit margins. The tire-maker posted a loss, but saw its stock jump 14% after cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 company said it would ramp up production and is ready for 25% to 30% increases in raw-material costs, including for natural rubber.

"Higher raw-material prices are cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 most significant challenge facing our industry today," Goodyear Chief Executive Richard Kramer said. "Commodity prices that were already high continue to increase." While Goodyear sold cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 same number of tires in North America in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 fourth quarter as in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 year-earlier quarter, sales were up 17% as consumers continued to buy Goodyear's more expensive tires.

Write to Jonathan Cheng at jonathan.cheng@wsj.com

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