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The surge in economic demand last year brought on by reopenings and economic stimulus had caught companies off guard, leaving them unable to expand production capacity enough to meet demand. Now, signs are emerging that supply is finally catching up.
This week, the Institute for Supply Management’s manufacturing index showed that the prices paid index dropped to 68 in December from 82 the previous month. That means components are becoming more available for companies to buy, bringing the prices of those parts down. Shipping container prices have fallen more than 50% since their 2021 peak, as measured by a composite container rates index, according to Wolfe Research. That also indicates that goods are becoming more available to be transported and sold.
“The supply-chain pressures leading to longer delivery times and rising prices may be easing,” Citigroup economist Andrew Hollenhorst wrote recently.
As firms can once again access the parts and supplies needed to meet demand, it could put them back on track toward meeting their sales goals. Their profits generally should improve, particularly as their costs will rise more slowly.
The stocks that should benefit the most from a recovering supply chain are those of goods-producing companies that rely on buying parts to make and sell their products—along with those that transport goods. Here are five stocks on Wolfe Research’s list of direct supply-chain beneficiaries. Four of the five stocks have seen gains in roughly the past two months, as the supply chain began to show signs of improvement. Some of their earning estimates have edged up, too.
General Motors (ticker: GM) said at the Credit Suisse Industrial Conference in early December that the supply shortage has “stabilized” and that it should improve during the course of the year. Earnings forecasts for the auto maker have already started creeping higher. Since the end of November—when many companies began saying the supply situation was improving—analysts’ 2022 earnings-per-share estimates are up a touch, but 2023 projections are up 2%, according to FactSet. The stock has risen 15% since the start of November, but with annual EPS growth expected to average 8% in the next two years, the stock could keeping rising—especially if profit expectations keep improving.
Aptiv (APTV), a $47 billion auto parts manufacturer, said in November that supply and production volumes should rise in the fourth quarter compared with the third quarter. Since just the beginning of November, 2023 EPS estimates are up 0.5%. Friday’s broader market selloff put the stock at a slight loss for the period, but that could present a buying opportunity, with more room for gains ahead.
Stanley Black & Decker
Stanley Black & Decker (SWK) said at the Baird global Industrials conference on Nov. 10 that, whatever happens with shortages and costs, the company is raising prices to protect its profit margins. The company’s 2023 per-share earnings estimate has risen 1.4% since early November, while the stock is up 5%.
Union Pacific (UNP) said at the Baird conference that “through next year, I think that [the supply chain] continues to get better.” The company’s 2023 EPS estimate is up 0.7% since just before the Baird conference, as management said the supply recovery will be slow. The stock is up 6%.
Rail transport peer CSX (CSX) said at the Baird conference that it, too, sees supplies recovering soon. Analysts profit forecasts are essentially flat since before then, though the stock is up 4%, suggesting the situation may soon improve.
Write to Jacob Sonenshine at [email protected]