Supply chain chaos, rising costs to hit Europe profits

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.
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 and Boohoo Group 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.
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), fertiliser 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).
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.