Margin compression continues in Q1
By Peter Garnry, Head of Equity Strategy at Saxo
Operating margins continue to be under pressure as companies are facing high wage growth in both the US and Europe. Our luxury theme basket is the best performing basket this year.
The key conclusion in the ongoing Q1 earnings season is that companies are still facing margin compression as inflation in wages and raw materials continue to eat into revenue which has reached a limit as companies cannot continue to pass on all of inflation to customers. Many consumer goods companies have reported many quarters of small q/q declines in volume suggesting that we are reaching the point when further aggressive price hikes could seriously erode volume and production efficiencies. The 12-month trailing EBITDA margin in the S&P 500 has declined to 19.2% in Q1 2023 which is close to the long-term average of 18.9%.
Two other conclusions from this earnings season are that European companies are doing relatively better than US companies and especially on revenue growth, and then technology sector seems to have managed to stop the bleeding on operating profits due to aggressive cost cutting.
Luxury boom
Our luxury theme basket is the best performing basket this year as investors are betting heavily on luxury stocks to thrive as China’s economy rebounds from its strict lockdown during the pandemic and Chinese tourists are allowed travel visas again. The luxury basket is up 21% this year outpacing the global equity market and the Q1 earnings so far from among other LVMH have been strong and above consensus. Richemont, the Swiss-based luxury maker in jewellery and watches, is expected to report FY23 Q4 earnings (ending 31 March) on Friday before European equity markets start trading with analysts expecting full-year revenue of €19.6bn up just 2% compared to FY22 which saw strong growth of 46% and EBITDA of €6.16bn up from €5.03bn a year ago. With revenue growth estimates for FY24 at only 7% y/y Richemont could surprise to the upside given the underlying momentum in China.
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