Inflation has meant good times for these five companies
Three energy companies, a fertilizer company and a drugmaker have all done very well while most of the rest of the United States struggles with soaring prices.
Jhere is a silver lining to the worst inflation since the 1980s. Just ask the companies betting on higher prices.
Raising prices becomes easier during inflation, when everyone seems to be doing it. Sometimes charging more makes sense. Inflation increases the cost of production and most businesses pass the cost on to customers. Sometimes, however, the higher prices go beyond the additional expenses incurred by the companies.
So Forbes tracked companies that increased their operating margins, a metric that closely gauges how much money companies make selling their products, to see who racks up the profits.
Operating margin is a fair indicator because it excludes borrowings, said Mai Iskandar-Datta, a finance professor at Wayne State University. Forbes. “Essentially you’re trying to get a bigger picture of how the business is performing,” she said. “You try to see how they’re doing without considering funding. It separates funding and investment decision-making.
Keep in mind how hard inflation is for employees. Workers’ compensation is not keeping up with rising prices. According to the US Bureau of Labor Statistics, the real average hourly wage – wage growth minus inflation – has fallen 2.8% over the past year. Add to that the fact that people are working fewer hours, and the story gets even darker. Real average weekly earnings fell 3.7% over the same period. As the third-quarter earnings season draws to a close, it’s no surprise that three of the top five spots on the current list of widest operating margins are energy companies.
The operating margin of a natural gas company EQT Corp. has risen from 20.3% for the 12 months ending September 2021 to 64% over the past year. The 64% is more than 20 percentage points higher than the company’s all-time high, set in 2015. EQT did not respond to a request for comment. For comparison, and acknowledging that the retail industry is a slightly different animal, big-box chain Target reported Wednesday that its operating margin fell to 3.9% in the third quarter from 7.8% in the same period a year ago.
How they did it:
A new addition to the S&P 500 Index, EQT is the largest natural gas producer in the United States. As the price of natural gas soared following Russia’s unprovoked invasion of Ukraine, EQT’s revenue also increased. During its earnings call and in a presentation to investors Oct. 26, the company cited cost reductions at its West Virginia wells and the impact of acquisitions as reasons it is hoarding cash.
But there is something else to consider when looking at the profit margins of EQT and other energy companies. They are not investing in new projects as much as they normally would during the boom phase of the commodity cycle. Research and development and exploration expenses eat into operating margins. So if energy companies don’t pay for new wells, operating margins will be higher.
“Today we see a restriction of capital in the sector,” said Gabriele Sorbara, managing director of Siebert Williams Shank & Co. Forbes. “If they’re growing, it’s mostly low-to-mid single-digit oil production growth. There is a huge amount of internally generated free cash flow and cash on the balance sheets. After many years of low returns from (explorers and producers) with periods of extreme boom and bust, companies are now maintaining discipline and returning money to shareholders rather than deploying capital for growth.
Marathon Oil, the exploration and production company with its roots in John D. Rockefeller’s Standard Oil, has posted an operating margin of 46% over the past 12 months. This is a gain of 32% over the prior period and set a new record for the company. Marathon did not respond to a request for comment.
How they did it:
There are no surprises here, but higher oil prices are great for producer bottom lines. “A lot of it is price-related, with Marathon’s realized price of oil about $24 a barrel higher and natural gas nearly 88% higher than a year ago,” Sorbara said. Forbes.
After its last quarterly report, fertilizer giant CF Industries ranked in the top five. The Deerfield, Illinois-based company increased its operating margin by 28% over the past year. The operating margin of 49% over the past 12 months is just below the 52% posted in 2012. CF Industries did not respond to a request for comment.
How they did it:
“It’s pretty basic,” said Charles Neivert, principal research analyst at Piper Sandler. Forbes. “In particular, where things got really weird was when the situation in Ukraine started going crazy. At that point, some things were already in place that were driving fertilizer prices up, but war has only exacerbated the situation.”
The rise in the cost of grain before the outbreak of the conflict paved the way for higher fertilizer prices, according to Neivert. “It’s about food,” he said. “Higher grain prices lead to higher fertilizer prices.” CF has benefited the most among its peers as it mainly focuses on the production of nitrogen fertilizers. “The only fertilizer that’s not a choice is nitrogen,” Neivert said. “You can play games with potash and phosphate, but it’s a virtual lock-in that if you don’t put nitrogen on a crop like corn, you’re pretty much guaranteeing yourself a drop in yield.”
Add another energy company to the list: Occidental Petroleum’s operating margin rose from 11% a year ago to 37% for the 12 months ending September. Still, Occidental has done much better in the past. In 2008, it recorded 12-month operating margins of just over 50%. Occidental did not respond to a request for comment.
How they did it:
Like their competitors on this list, higher energy prices are a boon for Occidental. What will Occidental do with the profits it has made? “As we enter 2023, we expect our free cash flow allocation to shift significantly toward shareholder returns,” CEO Vicki Hollub said on the company’s third quarter earnings call. company with investors and analysts.
Biogen, the pharmaceutical company that has made a name for itself in the treatment of multiple sclerosis, saw its operating margin drop from 3.4% for the 12 months ending September 2021 to 22.2% for the 12 months the most recent. Biogen declined to comment.
How they did it:
Call it a comeback. Biogen’s margins have been falling throughout 2021. According to FactSet data, the company had just turned a profit last year. Although large, the pharmaceutical giant’s operating margin is about half of what it was before the pandemic. “In 2021, there’s a bunch of stuff that happened on a GAAP basis,” said Myles Minter, research analyst at William Blair. Forbes. “They were going through a major drug launch for Alzheimer’s disease. They were building inventory and a sales force to support that. It was an absolute flop of a launch. Minter added that Biogen’s growing margins are the result of cutting expenses rather than bringing in more cash. “They can’t raise prices because they have generic competition,” Minter said.
We look at rolling 12-month changes in operating margins for members of the S&P 500. Using FactSet, we’ve collated the most recent year’s profit margins for companies with data as of September 2022. .
We then compared that to the 12 months ending at the same time in 2021.
We focus on companies that sell products we all buy. Consequently, banks and other financial companies were excluded from our calculations, while companies in sectors such as oil and gas, retail and pharmaceuticals remained.
We also eliminated businesses that were not profitable in 2021 and 2022. So, for example, cruise lines and much of the airline industry were excluded.
One last thing: we only relied on values in accordance with generally accepted accounting principles (GAAP).