The Supply Chain Problem Isn’t Going Away — But We Can Still Profit…
Target (NYSE: TGT) seems to have a problem. And it’s not alone, either…
On May 18th, when its first-quarter earnings came up short (inciting a fierce selloff), management pinned the blame squarely on one specific headwind. It’s not a lack of customers. In fact, store traffic continues to rise. Unfortunately, freight costs have exploded, rising “hundreds of millions more than already elevated expectations.”
Just about everybody is grappling with higher transportation expenses – or worse, facing shortages and costly delays for critical parts and components.
Ford Motor (NYSE: F) is seeing strong demand for new Broncos, Mustangs, and F-150 trucks. But somehow, that didn’t translate into heavier sales volume. Actually, the company shipped 9% fewer vehicles to dealerships last quarter. CEO Jim Farley pointed to the impact of “persistent constraints” hampering the firm’s ability to fulfill orders.
Sherwin Williams (NYSE: SHW) echoed that complaint. The company has a robust backlog and saw a decent 7% uplift in sales last quarter. Yet, thanks to “choppy availability”, it has had trouble keeping merchandise stocked and been forced to slash earnings guidance multiple times in recent months.
On the surface, a retailer, an automaker, and a paint supplier wouldn’t seem to have too much in common. But right now, all three are struggling with supply chain woes. They have plenty of company. Nike (NYSE: NKE) is in the same boat. So is Boston Beer (NYSE: SAM). And Caterpillar (NYSE: CAT).
It’s a long list.
The Ongoing Supply Chain Nightmare
At best, these businesses are coping with sharp price increases in raw materials and freight. At worst, they are simply unable to procure what is needed to fully manufacture products and ship them out the door, leading to widespread delays and order cancellations.
Back in January, I talked about the severe chip shortage that has crippled the production of cars and trucks. That’s just the tip of the iceberg. Farmers have had trouble getting basic inputs like livestock feed and crop fertilizer. More than 90% of homebuilders report extended waiting times for windows and floor tiles. I could go on…
These shortages are causing problems everywhere, from backyard swimming pool construction to fast-food menus. Across many industries, we’re seeing a perfect storm of demand spikes coinciding with supply shocks.
Of course, the lingering impact of Covid continues to take a toll as well. That’s what closed down Nike’s clothes and apparel factories in Vietnam, leading to the cancellation of 130 million items. Clogged ports and severe labor shortages aren’t helping. Neither is the war in Ukraine and sanctions on Russia.
Whatever the cause, these upstream production challenges have cascaded down to intermediate manufacturers and then spilled to downstream retailers. Pick a company at random, and odds are good it’s facing either raw material price inflation or stubborn supply chain constraints – or both.
Many have responded with measured price hikes. You’ll soon pay a bit more for a Hershey bar thanks to rising expenses for sugar, cocoa, and dairy. Starbucks is pulling that lever as well. When you’re paying $5 for a cappuccino, what’s another quarter?
Still, margins continue to compress across many sectors. For many, sales are up and net income is down. Even mighty Wal-Mart isn’t immune to these pressures. The company took in $3 billion more in revenue last quarter, but none of it reached the bottom line due to rising costs. Earnings for the period slid 23%. You can see what happened next…
CEOs are quick to point the blame. Of the 460 S&P companies to report first-quarter results the past few weeks, 338 of them cited some type of ongoing supply chain trouble. This has been a persistent issue for well over a year now. FactSet sifted through 2021 conference call transcripts and found that the phrase “supply chain” was mentioned 3,000 times.
While the term is frequently batted around, investors don’t always realize how damaging it can be to the bottom line. The aforementioned rising costs at Target have driven operating margins down to near 5%, versus about 8% this time last year.
That may not sound like much. But keep in mind, when you pull in $100 billion in annual revenue, every 100 basis point uptick in expenses drains $1 billion in profits.
Investing In The Solution…
While some of these supply deficits and order fulfillment issues will ease in time as producers fully ramp back up, this global bottleneck has underscored the vital importance of shipping (and its close sibling, logistics).
As a society, the only thing we hate more than overpaying is waiting. Amazon’s two-day shipping has conditioned us to get products from distribution hubs to our doorsteps with lightning speed.
That’s why I told my readers about XPO Logistics (NYSE: XPO) back in May of 2020. The company plays a key role in masterminding logistics, especially when it comes to ecommerce — from warehousing to LTL trucking. Management eventually decided to split the company in two in order to fuel growth and unlock shareholder value — but not before we rode XPO to a gain of 127%…
But first, those goods often have to be moved across the globe from factories in Malaysia or assembly plants in Taiwan.
I’m a big fan of dry bulk and container shipping, as seaborne freight accounts for 80% to 90% of global trade. As you might expect, companies like Global Ship Lease (NYSE: GSL) are enjoying bountiful cash flows these days as fleet charter revenues spike to record levels. That’s why I recommended it to my High-Yield Investing readers back in January of 2021. We rode this position up to a gain of 94% before pulling some profits off of the table recently…
Either one of these picks is worth considering for investors who are interested.
But as I recently told my Takeover Trader subscribers, I’ve got my eye on the railroad business. After all, once all those sporting goods and toys and home appliances reach our shores, they have to be moved again. And as you’ve probably heard, the trucking industry has been stalled by a severe shortage of available drivers. So once again, railroads have been tasked with the heavy lifting.
Either way, I expect this to be a key thing in the months and years to come. And that means as investors we need to give this corner of the market a serious look.
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If I’m right, not only will it will change the tech landscape forever – but it could also lead to massive profits for investors who get in before the rumor mill starts up. Go here now to get the details…