Dusseldorf Optimism still prevails in large parts of the economy: large demand and strong earnings have prompted chemical manufacturer BASF, sporting goods manufacturer Puma and aircraft manufacturer Airbus to increase their forecasts for the current fiscal year.
The caravan manufacturer Knaus Tabbert had previously lowered its sales and profitability forecast in view of the scarcity of materials. Delays in deliveries to chassis will temporarily halt production in the fourth quarter.
Continental and newcomer Knaus Tabbert will not be the only companies with such bad news. “Like Continental, the entire manufacturing industry is at risk of not achieving its profit targets,” predicts Michael Ausfelder from the independent investment consultancy VZ Vermögenszentrum.
In any case, the mood is no longer as optimistic as it was in the first half of the year. At that time, the catch-up effects resulting from the pandemic-induced standstill in the economy ensured rapid growth. In the first half of the year, more than half (53 percent) of the just over 300 German listed companies in the Prime Standard raised their annual forecast at least once. There had never been so many positive surprises before.
On Thursday, Volkswagen circumnavigated the profit warning that shareholders did not like, but lowered its sales expectations for the current year due to supply bottlenecks and delivery failures. Due to the ongoing shortage of chips, the operating result before special items fell unexpectedly in the third quarter by twelve percent to around 2.8 billion euros.
The board of the laser technology specialist LPKF Laser spoke of “ongoing challenges on the global procurement markets”. Because of the red numbers in the first nine months, sales for the year as a whole will only be at the lower end of the forecast range of 110 to 120 million euros.
Profit warnings are also reported from the USA
Wall Street had already provided a foretaste of the abrupt turnaround in the current quarterly season, where large companies such as the conglomerate Honeywell and the household appliance manufacturer Whirlpool reduced their business expectations. “We expect similar warnings on the German stock market in the upcoming profit season,” predicts Commerzbank analyst Andreas Hürkamp.
According to a majority of analysts, even Apple will have to reduce its production targets for the new iPhone 13 in the next few weeks. Important components are missing. CEO Tim Cook had already warned in July that delivery bottlenecks could become noticeable in the next fiscal quarter.
Rapidly rising raw material prices and falling economic data are also causing uncertainty. They point to a slowdown in global growth. In August, according to the Federal Statistical Office, incoming orders for German industrial companies fell by 7.7 percent compared to the previous month, and production fell by 4.7 percent.
The three major car manufacturers BMW, Daimler and Volkswagen are hardest hit by the shortage of materials. Ironically, in the industry, which, with a net profit of 23.8 billion euros in the first half of the year, represented a good third of the total profit of all 40 Dax companies.
“The chip crisis is having an increasingly severe impact on the new car market,” says Peter Fuß, partner at the management consultancy EY. Currently, millions of cars cannot be built and delivered because of a lack of semiconductors. “It will be extremely tight for many suppliers in the coming months,” says Fuß.
Not only semiconductors, magnesium, which is important in car production, is also missing. China, which accounts for 80 percent of global exports, currently delivers next to nothing. The current supplies in Europe should be exhausted by the end of November at the latest, the Metalworkers Association recently warned.
In addition, the cost factor is becoming more and more important. The price for transporting freight has more than doubled since the beginning of the year. This applies above all to companies whose production is concentrated in a few Asian countries, as is the case with sporting goods manufacturers, but sales are spread across many regions around the world.
Nike, for example, has a good 50 percent of its sneakers manufactured in Vietnam. According to the company, ten weeks of production were lost as a result of factory closures. The world’s largest sporting goods manufacturer has therefore lowered its sales targets for the current financial year.
Dependence on China burdened
After all, the weaker growth in China, the most important sales country for many German companies, threatens the high profit expectations. China’s economy only grew by 4.9 percent in the third quarter compared to the previous year. Compared to the previous quarter, there was almost a standstill with an increase of 0.2 percent. That is as small an increase as only once in the past ten years. China is the most important sales market not only for the three car manufacturers BMW, Daimler and VW, but also for Infineon and Adidas.
Often there is a lack of coal to generate electricity, so that a number of Chinese companies have had to stop their conveyor belts for weeks. In addition, there have been new outbreaks of delta variants of the Covid virus in recent weeks, to which the provincial governments reacted with rigorous lockdowns, so that many companies could no longer produce. On top of that, the construction boom has ebbed since the real estate financier Evergrande got into financial difficulties and triggered concerns about a chain reaction.
“If the shutdowns spread further, they could seriously disrupt the global supply chains, which are already under pressure from the pandemic, and put the global economy at risk,” warns Ryan McGrail, an analyst at the American asset manager Loomis Sayles.
The effects would be devastating: According to Handelsblatt calculations, the listed companies in the Dax and MDax generate around two thirds of their sales abroad and are therefore dependent on a strong global economy.
Production is shrinking, especially in industry, because important preliminary products are missing. According to a survey by the Ifo Institute, around 70 percent of the companies surveyed recently complained that their production was being hindered by the bottlenecks.
Raised forecasts will not always be sustainable
But after the strong first half of the year, which the Dax companies ended with a record net profit of almost 63 billion euros, optimism still prevails with a view to the year as a whole. The companies have contributed to this with their many raised forecasts, whereupon many analysts are increasing their expectations for the rest of the financial year, often more than would have been necessary due to the strong first half of the year alone.
A good example of this is BASF: Based on the better-than-expected result for the second quarter alone, the estimates for earnings before taxes, interest, depreciation and amortization (Ebitda) would have been around two percent for the full year according to calculations by Commerzbank analyst Markus Wallner need to be increased. Instead, the consensus estimates rose by more than ten percent.
Obviously, the analysts continue to see the outlook for BASF as very positive and have therefore significantly increased their estimates for the remainder of the fiscal year. The same can be observed with other DAX companies such as Covestro or MTU.
BASF has raised its forecast for the third time this year. The basic chemicals business is doing well. But things are going worse in other segments, such as highly refined chemical products, seeds and automotive supplies. The group is suffering from rising raw material, energy and freight costs. Company boss Martin Brudermüller assumes that delivery bottlenecks will affect the global economic recovery in the fourth quarter.
The chemical industry is an important economic indicator because its products are needed in all major branches of industry. “For the fourth quarter, we expect a setback in corporate profits,” says Marc Decker, Head of Fund Management at Merck Finck. The momentum of the first three quarters is unlikely to continue. Positive surprises are likely to be less frequent, according to Decker, “especially since the bar for corporate profits has so far been continuously raised”.
This is especially true for some newcomers to the DAX, whose share prices rose sharply before their ascent. Laboratory equipment supplier Sartorius reported a 50 percent increase in sales compared to the previous year and a pre-tax return on sales of a good 30 percent. The new orders increased by more than 70 percent. The Göttingen-based company also confirmed its annual forecast, which was not raised until the summer.
It couldn’t be any better. But investors reacted with sales, and the share price fell. This had risen by more than 6,000 percent in the past ten years. That now opens up a lot of potential for disappointment.
But there are also winners
But not all industries suffer from the scarcity of materials. The strong demand and increasing production have shortened many preliminary products such as building materials and caused their prices to rise again in the third quarter. Many companies with higher margins benefit from this, because more net profit remains with every euro of sales.
This is likely to be reflected in higher returns on sales, for example at steel manufacturers such as Thyssen-Krupp and Salzgitter, building materials groups such as Heidelberg Cement and chemical producers such as Covestro.
“Infineon should make a lot of money from the chip demand,” says wealth expert Ausfelder. Classic corona winners such as the food supplier Delivery Hero or the cooking box specialist Hello Fresh should continue to do well. The same goes for the pharmaceutical and biotech industries, led by the Covid-19 vaccine manufacturer Biontech.
More: Corporations raise forecasts more often than ever