By Lewis Krauskopf
NEWYORK -Corporate results in the industrial and materials sectors could offer a snapshot of how companies in a key swath of the U.S. economy are dealing with surging inflation, supply chain bottlenecks and higher commodity prices.
Companies in those sectors — which include logistics and transportation firms, major chemical makers and manufacturers and suppliers for the aerospace, automotive and construction industries — are expected to post strong third-quarter results.
Their position in the global economy, however, gives many companies in the industrial and materials sectors a window into the fallout from rising input costs, supply chain snags and other issues that have bedeviled the United States and other countries as economic reopenings spur a surge in demand.
Signs that companies are continuing to raise costs or expect inflation and logistics snafus to persist could bolster the view that the recent surge in consumer prices will prove more sustainable than expected, despite assurances from the Federal Reserve that the recent rise is likely transitory.
Supply chain and inflation issues have rippled through companies in a broad range of sectors, from tech companies to consumer product firms.
Many industrial and materials companies have already relayed the challenges they face. Diversified manufacturer 3M at an investor conference last month pointed to inflation coming in higher than expected, with cost pressures in resins, wood pulp and labor. Eaton Corp last month warned its third-quarter revenue would come in “slightly below” the low end of its forecast largely due to the “inability to serve the demand that we’re getting.”
Also last month, paint and coatings company Sherwin-Williams lowered its 2021 sales and earnings estimates citing “escalating raw material availability challenges and inflation headwinds.”
“Everyone is going to feel the pain at different rates,” said Joshua Aguilar, U.S. multi-industry analyst at Morningstar. “Your short-cycle businesses are going to feel it first, but no one is immune. What you want is ideally somebody who has the pricing lever to offset that.”
Investors will learn more in the coming days as corporate reports arrive, including Dow Inc on Thursday, and 3M, General Electric, and Caterpillar next week.
Industrial and materials were among the economically sensitive cyclical stocks that had broadly benefited after breakthrough vaccine data last November created optimism about the economy’s ability to emerge from the coronavirus pandemic.
Yet while energy and financials have continued to shine among such economically sensitive groups, industrial and material shares have been weighed down by worries over how fallout from higher prices and supply chain issues will affect their bottom lines, investors said.
While the overall S&P 500 has gained 14% since the first quarter ended, the S&P 500 industrials sector has increased about 6%, and the materials sector has climbed roughly 8%.
“We know this quarter was hit by these margin issues, but are we going to see this continue for the next two quarters, or is it a one-quarter event?” said Walter Todd, chief investment officer with Greenwood Capital in South Carolina. “That’s the real unknown at this point, and that will drive … how these stocks react.”
Industrials make up 8% of the overall S&P 500 index while materials account for 2.5%.
Some investors are betting companies in the sectors can see more upside, especially if they can weather rising costs including with strong pricing power for their products.
Ryan Cope, portfolio manager at American Century Investments, holds shares of bearings maker Timken Co in the small-cap value portfolio he manages.
“Companies that have pricing power in their business models will really start to show much better results than companies that do not,” Cope said.