For some time, businesses have had to deal with “supply chain issues”. “Logistics”, which was honed to a precise science in a world with international manufacturing, mining and transportation links, has since the Covid pandemic performed like a poorly maintained internal combustion engine belching smoke out of its tail pipe. Because industry has not been able to easily get product from Point A to Point B – much less to Points C & D – costs have risen. Inflation has inserted itself into producer prices and there has been some carryover into consumer prices. But some companies have done a better job of coping than others and a good part of that ability to cope comes from size. Larger firms have been better able to negotiate contracts with suppliers and get into supply lines to make sure that they have needed supplies or at least get preferential treatment. Many big companies have been able to use their scale to successfully deal with rising prices and disruption, enabling them to report surprisingly strong profits – earnings which have exceeded 2019 results. Small companies have been at a disadvantage because they are simply not as large a customer. Big orders get filled first and perhaps they are the orders that get filled before supplier inventory runs out. This has also meant that certain small corporations have had to use credit lines to shore up liquidity as cash flow is not robust. Cash has been pinched because costs are up and sales turnover is down due to logistics “knots”. Extrapolation of this situation would suggest that “the big will only get bigger” and the small will not survive in many cases. Internationalization has been a boon to many a company over the years and the refinement of the science of logistics has lowered costs and expanded markets for the world’s consumers. Covid “threw sand into the supply chain’s gears” and this exposed a truth that to compete successfully, it is better to be big.
EARNINGS SEASON SO FAR….
So far, fourth quarter 2021 corporate earnings have surprised Wall Street analysts to the upside. At the start of this reporting season, it was expected that company sales and earnings would increase 12% and 22% respectively. Now that we are 80% of the way through corporate reports, the results are better, +14.5% and +32% for sales and earnings. So company performance continues to be stronger than expected, carrying on a trend that has been in place for several years, well underpinning equity prices.
A FINAL THOUGHT……
Howard Marks, co-Founder and co-Chairman of Oaktree Capital Management, is an investment industry leader to whom we listen for thoughtful guidance, especially during troubled times in the world:
“It’s also important that people realize you don’t make money through what you buy and sell. You make it through what you hold and then let the magic of compounding work.”
Wise words for instances when there is great temptation to sell for no particular reason other than fear.