“We see risk that ACI is over-earning, with signs that peers are making price investments and also having difficulty passing on inflation, which is concerning given the recent meaningful margin expansion and gains for ACI’s stock,” the note said.
Lower-wage workers’ hourly pay has been steadily rising in recent months as businesses struggle to return to full staffing levels following the pandemic shutdowns in 2020.
Albertsons has a more unionized workforce than some of its competitors, which means it may be enjoying a temporary reprieve from rising wages, which will change in the coming years, according to BMO.
“We see risk to [gross margin] in a more price-sensitive consumer environment, as well as wage risk, because unionized grocers have been shielded from broader industry wage rate increases due to contract negotiation cycles.” This could indicate a wave of wage investments in 2022/2023,” according to the note.
Last week, Lordstown announced a deal to sell its Ohio factory to tech giant Foxconn, which boosted the company’s stock price in the short term. However, according to Morgan Stanley analyst Adam Jonas, who downgraded the stock to underweight from equal weight, the new round of cash is unlikely to provide much upside for investors.
“While the agreement with Foxconn helps secure the future of the Lordstown plant and buys time for RIDE to explore other business opportunities (new programs, new platforms, new segments that have yet to be developed), we believe there would likely be little left for shareholders,” Jonas wrote in a note to clients on Monday evening.
Foxconn will manufacture Lordstown’s Endurance pickup truck as part of the deal, but Morgan Stanley believes this may be a mistake.
“Continuing with the Endurance likely exposes the company to the risk of further elevated cash burn and liquidity risks, even in a contract manufacturing scenario that involves shifting much of the fixed cost burden (plant and most labor) to Foxconn,” according to the note.
Furthermore, Lordstown will receive $230 million for the sale of the plant, which is less than 20% of the facility’s previous valuation by Morgan Stanley.
Following a 10% drop on Monday, shares were down another 7.5 percent in early trading Tuesday.
Columbia Sportswear stock
Columbia’s holiday sales could be strong due to early shipping, but production delays have likely worsened since the company’s last earnings report in August, according to Bank of America.
Columbia shares have fallen 5% in the last three months, and Bank of America does not expect a significant rebound.
The long-term outlook for Columbia remains positive, but the company will likely struggle next year, according to Bank of America.
American Airlines stock
Analyst Catherine O’Brien downgraded the industry’s near-term outlook, stating that the late-summer slowdown due to the delta variant and higher fuel prices could lead to a weak winter for airlines. The analyst also mentioned slower-than-expected recoveries for business and international travel.
“Our lower revenue expectations, combined with higher jet fuel prices and inflationary non-fuel cost pressures, drive our December Q outlook to an adjusted net loss of $1.5 billion, down from a $350 million profit previously, and our 2022 adjusted net income forecast to $8.1 billion,” according to the note.
O’Brien downgraded American to sell from neutral, citing the slowdown as a cause for concern about the company’s debt load.
“We anticipate that AAL shares will underperform due to its relatively higher operating leverage, which will weigh on its profitability recovery given our views on capacity/pricing. “American’s higher operating leverage is due in part to its relatively higher leverage over the medium term, despite our assumption that the company significantly delevers over the next several years,” according to the note.
American’s exposure to business and international travel, which are recovering more slowly than domestic leisure travel, may cause debt payments to have a greater impact on profits than other airlines, according to Goldman.
American shares are up 36% year to date, but the stock is still well below where it was prior to the Covid sell-off in March 2020.
JetBlue was also downgraded to neutral from buy by Goldman, owing in part to its partnership with American Airlines.
Despite the downgrades, O’Brien remains optimistic about the airline industry in the long run.
U.S. Steel stock
“From 2021 to date, US domestic [hot-rolled coil steel] prices have averaged more than $1,500/ton, more than 140 percent higher than historical price levels.” While this has been driven in part by strong demand and a lagging supply response, we believe the market is anticipating a correction in the coming months as additional import volumes arrive and new capacity begins operations,” the note stated.
Goldman noted that Nucor’s recent outperformance implies that there is less upside in the future, whereas U.S. Steel’s push to reduce carbon emissions will most likely hurt its cash flow.
“Our positive outlook was driven by rising HRC prices driving margin expansion, the company’s financial strength underpinning both a strong capital returns program and the capacity for growth to further drive margin expansion in periods of normalized steel prices. While our positive outlook on these drivers has not changed, we believe they are more accurately reflected in the current stock price,” Chieng said of Nucor.
Goldman slashed its Nucor price target to $108 per share from $123 per share, and its U.S. Steel target to $21 per share from $34 per share. The new targets are 9.4 percent higher and 6.4 percent lower than where the stocks closed on Tuesday.
However, the firm is not bearish on all steel stocks. Cleveland-Cliffs was upgraded to buy from neutral by Chieng, who cited the company’s upcoming contract negotiations with automakers.
These stocks could drag your portfolio
Brent crude oil rose above $81 per barrel for the first time since October 2018, while West Texas Intermediate crude rose above $78 per barrel, reaching its highest level since 2014. The increase came as OPEC and its allies agreed to stick to their plan of gradual output increases, despite growing concerns that demand is outstripping supply.
As economies reopen and consumers return to the road, demand for petroleum products has recovered. Simultaneously, supply has remained constrained. While Hurricane Ida knocked some production in the Gulf of Mexico offline, US producers have been slow to return barrels to the market.
“Higher oil prices are a tailwind to Energy EPS but a headwind to non-Energy sectors that use oil as an input or are sensitive to consumer spending,” Goldman wrote in a client note.
With this in mind, the firm compiled a list of companies that are vulnerable to rising crude prices. Each of the companies on the list has at least 15% of its total cost of goods sold leveraged to oil and oil derivatives.
Murphy USA, a retail gas station, tops the list with 81 percent of its input costs exposed to oil, followed by Avient Corp. and Casey’s General Stores at 70 percent. Other companies on the list include Eastman Chemical, Sherwin-Williams, and Allegiant Travel. Not surprisingly, airline companies such as Spirit Airlines, Alaska Airlines, JetBlue, United Airlines, Southwest, American Airlines, and Delta are well represented.
Brent is up more than 55% for 2021, and Goldman Sachs does not expect the rally to slow. The firm recently raised its year-end forecast for the benchmark from $80 to $90 per barrel.
The effects on the overall market, however, should be limited, according to the firm. Oil prices, according to Chief U.S. Equity Strategist David Kostin, have a “roughly neutral” impact on aggregate Dow Jones earnings per share, in part because the sector is now such a small percentage of the overall Dow Jones.
“Every 10% increase in Brent prices raises Dow Jones EPS by only 0.3 percent,” he wrote in a client note. “The contribution of Energy to index EPS is likely to be smaller today, as it accounts for only 4% of Dow Jones 2021[expected] EPS.”
Higher crude and natural gas prices are boosting energy stocks. In what was otherwise a down day for stocks, the sector gained about 2% on Monday. The Dow Jones energy sector was the only one to gain ground in September. For 2021, it is up 45 percent.
Bank of America downgraded Kohl’s to underperform from buy. The company also reduced its price target from $75 to $48 per share. The new forecast implies a 10.6 percent drop from Wednesday’s closing price.
“We believe Kohl’s disproportionate exposure to Activewear brands, which are experiencing significant supply chain issues, may impede its sales recovery and offset the company’s progress in its women’s and beauty categories,” Bank of America’s Lorraine Hutchinson wrote in a note Thursday.
Activewear has emerged as a key driver of growth for Kohl’s, accounting for 24 percent of sales in the second quarter, with a 40 percent year-over-year increase.
However, the retailer’s best-selling active brands, such as Nike, Under Armour, Adidas, and Champion, are experiencing supply chain issues related to Covid.
“These slowdowns may jeopardize KSS’ ability to drive the outsized growth in Active that has offset declines in other areas,” Hutchinson warned.
In addition, inventory shortages hampered Kohl’s women’s business in the second quarter. Bank of America predicts that the women’s business will continue to struggle as supply chain issues worsen.
According to the bank, the supply chain pain could overshadow Kohl’s gains from its partnership with beauty retailer Sephora.
Kohl’s stock has outperformed the market this year, rising 31.9 percent versus 16.1 percent for the Dow Jones.