Strategic Movements November 2021

How are companies in industrial and consumer markets managing through this inflationary period?  Are they raising prices faster than, equal to, or slower than inflationary input costs?  How apparent are investors’ responses?  Exploiting pricing power impacts corporate valuations in the short run in, at best, a very muted positive manner and are clearly impacted by many more factors than price increases related to input cost inflation.  What impact do you detect from the following business cases?

Union Pacific, CSX, and Others Leverage Pricing Power

Fuel costs are up by 74% over last year for Union Pacific (UNP).  Moreover, locomotive productivity is down by 8% at Union Pacific.  Disruptions like those of recent shortages in chassis used for unloading, wildfires in the western US, and labor are usually correlated to profit shortfalls.  How are the railroads managing? Jennifer Hamann, Union Pacific’s CFO, states strong demand “supports pricing actions that yield dollars exceeding inflation.”  Results:  UP’s operating income is up by 9% even as volumes have decreased by 4%.  UPN closed at $241.3 on 19 November and climbed slightly on the days following with a P/E ratio of 25.8; 2020 revenue was $19.5 billion.  CSX, which has had a similar experience, closed at $36.1 on 19 November with a P/E ratio of 22.7; 2020 revenue was $10.6 billion.

J.M. Smucker Achieves Higher Revenue amidst Higher Costs, but Margins?

J.M. Smucker (SJM), the maker of Jiff, Folgers, Café Bustelo, Dunkin, Meow Mix, Milk Bones, and the eponymous Smucker jellies and jams, reports higher prices and higher costs.  Input costs of transportation, ingredients, packaging, labor are all higher.  Smucker stated in August it would raise prices in response to inflation.  CEO Mark Smucker commented on Tuesday, November 23, “We delivered robust organic top-line growth across each of our segments, reflecting consumers continued demand for our brands and successful implementation of initial pricing actions.”  Well, that is true for topline revenue, but not profit margins.  Topline revenue in many departments is up:  8% in coffee, 9% in consumer foods, 6% in Jiff and Uncrustables, and 7% in pet food.  Unfortunately, margins fell from 40.2% to 34.7%.  SJM closed at $133.6 on 23 November, up from the day prior to the announcement, with a P/E ratio of 18.8; FY 2021 revenue was $8.0 billion.

Coca-Cola rebounds from Pandemic Slump through Price and Mix

Coca-Cola (KO) achieved price increases.  James Quincey, CEO, stated that U.S. consumers are responding better today than with a similar price increase “four or five years ago”. Price and mix contribute six percentage points to the overall 14% rise in organic revenue.  Result: stock gained 1.9%. KO closed at $27.2 on 27 October, up from the day prior to the announcement, with a P/E ratio of 27.2; FY 2020 revenue was $33.0 billion.

UPS Improves Revenue Despite Lower Volumes

Any simply breakeven analysis will show that the only way a company can improve revenue with lower volumes is through higher prices.  Enter Carol Tomé, CEO of UPS (UPS).  Third quarter 2021 revenue at UPS rose 9.2% over the year prior largely through increasing the revenue per item shipped by 13% while daily volume fell 2%.  Ms. Tomé plans further price increase of 5.9% in 2022, matching that planned by competitor FedEx.  Like other companies, UPS is facing cost increases, specifically citing labor.  UPS closed at $218.1 on 26 October, up from the day prior to the announcement, with a P/E ratio of 29.4; FY 2020 revenue was $84.6 billion.

Kraft Heinz Failed to Impress Despite Price Increases

Kraft Heinz (KHC) reported 1.3% higher revenue on comparable sales one year prior after increasing prices on two-thirds of their products, raising overall prices by 4–5%.  (Please note that the price increases were wisely offering specific.) Their internal Price-Volume-Mix analysis indicates prices were up by 1.5% overall while their Volume-Mix was down 1.0%. Labor, transportation, and manufacturing Input costs were all up.  Net income attributable to shareholders was also up but largely due to a write-off of goodwill a year prior.  “I am incredibly proud of our Kraft Heinz team for delivering another quarter of results that exceed our expectations, even as we face the ongoing challenges of the pandemic and, now, escalating inflation,” said Kraft Heinz CEO Miguel Patricio. Investors were unmoved.  KHC closed at $36.4 on 27 October, relatively unchanged from the day prior to the announcement, with a P/E ratio of 19.5; FY 2020 revenue was $26.2 billion.

McDonald’s Improves Price and Mix above Inflationary Costs

Wages are up at least 10% this year at McDonald’s (MCD) U.S. restaurants.  Paper, food, and other supplies are also up with commodity prices up 3.5 to 4% from a year prior.  How are prices doing in comparison to inflationary input costs?  Executives expect prices to be up by 6% this year compared to last year.  Despite the price increase, demand is also up by 10.3% compared with the same period before the pandemic. Bigger orders and higher prices lifted revenue.  Result: 22% increase in net income over a year prior – meaning price increases more than offset cost increases.  MCD closed at $242.6 on 27 October, up from the day prior to the announcement, with a P/E ratio of 25.2; FY 2020 revenue was $19.2 billion.

Mondelez improve Prices, Volume and Mix.  Investors’ response?

Mondelez (MDLZ), maker of Belvita, Cadbury, Chips Ahoy, Honey Mad, Hu, Oreo, Milka, Ritz, Philadelphia, Tang, Triscuit, Toblerone, and many other cookie, cracker, chocolate and snack brands, reported earnings on November 2^nd.  “We’ve been increasing prices, and we plan to increase prices more than we’ve done at least in the time that I’m here and probably for quite a while as a company,” said CEO Dirk Van de Put.  Net revenue increased 7.8% and earnings per share increase 14.1%, while their internal Price-Volume-Mix analysis indicates prices were up by 2.4% overall AND their Volume-Mix was up 3.1%.  The next price round is planned to deliver an overall 6–7% increase in the U.S. Investors were only slightly impressed. MDLZ closed at $62.9 on 2 November up slightly from the day before and rising further the next day, with a P/E ratio of 19.6; FY 2020 revenue was $26.8 billion.

Tyson Improves Pricing Above Inflationary Cost Increases

Tyson (TSN), the Arkansas-based meat giant producer of beef, pork, and chicken, lifted prices across all its major divisions above inflationary cost pressures.  With logistics expenses up 30%, and other expenses related to wages, benefits, packaging, ingredients, and grain also up, Tyson and its industry peers are experiencing extraordinary input cost inflation.  Donnie King, CEO stated “I can’t think of a single thing that has either stayed the same or gone down.”  In response to the cost increases, beef prices increased 33%, pork by 38%, and chicken by 19%.  Result: revenue climbed by 12% and margins climbed to 22.9% compared to 9.7% in the same quarter of 2019.  In this industry, Tyson demonstrated that price increases can exceed cost increases when demand is flat (or high) and supply is constrained.  TSN closed at $81.6 on 15 November, relatively unchanged, with a P/E ratio of 10.9; FY 2021 revenue was $47.0 billion.

Lowe’s Too Improves

Even at this point in the pandemic, U.S. consumers want to improve their homes.  Lowe’s (LOW) improved its margins by raising prices according to CFO David Denton.  Comparable revenue was up 2.2.% over same period last year.  Investors appear to like the performance.  LOW closed at $243.7 on 17 November, up from the week before and continued climbing the week after the announcement, with a P/E ratio of 21.4; FY 2021 revenue was $89.6 billion.