CEOs love to complain about inflation and rising rates. But a handful of S&P 500 firm are better protected from rising prices than others.
Analysts expect nine S&P 500 companies, including Prologis, CME Group and Coterra Energy, to post sky-high net profit margins of 40% or higher in the soon-to-be-reported third quarter, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. And all of these margins — how much is left of revenue after paying all costs — are even higher than they were at these companies in the previous 12 months.
High net margins are a reflection of businesses with pricing power, cost controls — or both. And in light of rising inflation, labor costs and slowing economic growth, expect Wall Street to focus on who's holding the line with net margin.
"No CEO ... has to sound positive on their third-quarter earnings call or give analysts and shareholders upbeat guidance. They most likely will not, and this will not be a surprise," said Nick Colas of DataTrek Research. "What Wall Street wants to hear, however, is a commitment to continued high levels of profitability and a company's plans to achieve that result regardless of the operating environment."
Net Profit Margins In Focus
S&P 500 investors are braced for a mess for third-quarter profit. That's why margins will be the focus.
Profit reported by S&P 500 companies is only expected to rise 2.4% in the September-ended quarter, says John Butters of FactSet. And if that's true, it would mark the S&P 500's lowest profit growth rate since the third quarter of 2020.
But here's the one bright spot. Analysts also expect S&P 500 companies to post an impressive net profit margin of 12.2%, FactSet says. Additionally, most sectors will post net profit margins of 10% or more, Colas says.
"This net margin discussion doesn't get much attention, but it is critically important to the question of sustainable corporate earnings power which underpins current S&P 500 valuations," Colas said.
What are some of these profitability powerhouses?
Finding Big Money In Property
You might think your annual subscriptions like Amazon Prime are pure profit for the company. But it's who Amazon.com pays that's the real profit winner.
Prologis, a warehousing giant that owns many of the distribution centers Amazon uses, is seen as the net margin king of the third quarter. Keep in mind that Prologis, in many ways, is Amazon.com's landlord. Analysts think the company will earn nearly $940 million in profit on revenue of $1.1 billion in the third quarter. If that's right, that means the real estate company sports a net profit margin of 82%. That's the loftiest margin in all of the S&P 500.
Big margins aren't factoring into Prologis' stock price, yet. Shares are down more than 40% this year, as investors worry about Amazon retrenching after boosting capacity following Covid-19. And that is an issue for it to work out. Prologis' profit-per-share isn't seen returning to 2021 levels until some point in 2026. But it at least has impressive pricing power in the meantime.
Margins, though, matter in real estate outside of Amazon's retrenchment. Another real estate firm, VICI, owns the property on which many casinos are built, like Caesar's Palace. Its shares are up 0.8% this year, much better than the S&P 500's more than 20% drop. And much of that's due to its net margin, seen hitting nearly 74% in the third quarter.
Driving Profitability In Financials And Energy
If you want a trade a commodity, to profit or hedge from rising prices, you'll most likely need to use systems from CME Group, which operates four futures exchangespld.
In many ways, the company is well positioned during times of rising inflation and rates. And that's clear in analysts' net margin forecast of 56% in the third quarter. The stock is down nearly 26% this year, but it's not due to the fundamentals. Just this year, analysts think the company's profit will rise more than 18% on just 7% higher revenue of $5 billion. Now, that's some margin power.
And some S&P 500 investors are already plugging into margins. Shares of oil explorer Coterra are up nearly 50% this year. Analysts clearly like the company's expected 49.8% net profit margin in the third quarter. That's even higher than its adjusted 32% net margin in the past 12 months.
"This net margin discussion doesn't get much attention, but it is critically important to the question of sustainable corporate earnings power which underpins current S&P 500 valuations," Colas said.
S&P 500 Companies With Highest Expected Net Margins
Based on forecasts for third quarter of 2022
| Company | Ticker | Third-quarter net margin expected | Sector |
|---|---|---|---|
| Prologis | 82.3% | Real Estate | |
| VICI Properties | 73.6% | Real Estate | |
| CME Group | 56.0% | Financials | |
| Extra Space Storage | 52.8% | Real Estate | |
| Visa | 52.3% | Information Technology | |
| Broadcom | 50.2% | Information Technology | |
| Coterra Energy | 49.8% | Energy | |
| Diamondback Energy | 48.6% | Energy | |
| Signature Bank | 46.2% | Financials |
Sources: IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
