Strategic Movements October 2021

What Will Samsung Do with Windfall Profits from Pricing Power

Samsung Electronics Co. (SSNLF) forecast a 28% increase in profits for Q3 2021 in early October.  Actual earnings call to be held on 28 October. Revenue grew 9% helped, but the real driver was price.  Samsung makes silicon electronic chips along with other major electronics.  The chip industry has faced supply constraints over the past few months, leading to a sudden pricing power increase for chip suppliers.  What should Samsung do with their sudden windfall in profits?  Pass it on to investors, hold it for a rainy day, make acquisitions, or reinvest?  Samsung’s choice:  a $205 billion investments plan for leadership in chip manufacturing.  TSMC and Intel have both made similar announcements.  Will they face overinvestment?  Possibly but I am doubtful today due to secular global trends.  2020 Revenue of $237 trillion and P/E of 13.9.

Corporate Sustainability Bonds and Value-Based Pricing

Anheuser-Busch InBev SA, Enel SPA, and Verizon Communications Inc. pledged in late September 2021 to sell half their corporate debt, including bonds, tied to environmental, social, or governance (ESG) targets by 2025.  The interest rates on these sustainability bonds adjust lower if the companies hit their ESG targets, thus making it more expensive for buyers to hold.  Great example of value-based pricing:  if investors (people) value sustainability, they can pay for it in terms of ESG and sustainability related corporate bonds.

Pigs Supply and Demand

Prices for pork have fallen by 56% between January and October of 2021.  Why?  China had been heavily purchasing pork globally when their herds collapsed due to a swine fever in late 2019.  Since then, they replenished their hog production, now standing near 439 million up from 370 million last year.  With greater supply and relatively steady demand, prices will drop. Econ 101 works well in describing certain markets.

Darden Challenged in Passing through Inflationary Cost with Price Increases

Darden Restaurants Inc. (DRI), the parent company of Olive Garden, Longhorn Steakhouse, Cheddars, Capital Grill, Eddie V’s and other full service restaurants, projected sales increases for 2022 in the range of $9.4-9.6 billion up from 2021 revenue of $7.2 billion.  They also reported 4% inflationary cost pressures due to labor and ingredient challenges.  Will they raise prices in response?  CEO Eugene Lee states the company will be “very cautious” in its pricing decisions.  “We want to make sure this big group of consumers that we service feel as though they can still come to our restaurants and get an extremely great value for what they have to pay. … Because at some point your average consumer could get priced out of casual dining if it costs too much”, said Lee.  Stock price rose 6% to $159.50 on the day of the announcement on September 23^rd yet fell to $149.15 three weeks following.  I suspect investors realized that a Darden that can’t take price up when the globe is experiencing inflation is a Darden that isn’t as valuable as they hoped. 2020 Revenue of $7.8 billion and P/E of 23.4.