Chevron shares & Co: The expensive profiteers

WIf you want to buy a watch from the luxury Swiss brand Hublot, you have to dig a little deeper into your pocket. The brand, which belongs to the luxury conglomerate LVMH, has announced price increases of three to four percent. Customers should be able to get over it. At an average retail price of ruAnd 20,000 euros that ist Hublot to those on a generous budget.

Not all consumers have it that easy. The Russian attack on Ukraine has further fueled inflation in the western world. Consumer prices in the euro zone rose by 7.5 percent in March. According to provisional figures from the Federal Statistical Office, prices in Germany rose by 7.3 percent, which is the most extreme rate since autumn 1981. The largest increase was in household energy and fuels, which rose by almost 40 percent. Germans had to pay 6.2 percent more for food than in the same period last year. This puts consumers in the lower income brackets in particular under pressure.

Companies also have to calculate sharply: Because of the higher costs, more than ever before want to raise their prices in the next three months, according to a survey by the Munich Ifo Institute. Not every company will be able to do this. Consumer goods manufacturers have already warned that it will become more difficult to raise prices further. That could squeeze the margins of the corporations. Unilever said in February it could take two years for profit margin to return to 2021 levels. Even Nestl, a star in the industry with its strong brands, got the financial markets in the mood that the margin could fall this year due to rising costs for raw materials and logistics. The investment bank JP Morgan has lowered its earnings estimates for the current year for many European consumer goods manufacturers. Above all, the manufacturers of beer, household items, personal care and food are affected by rising costs. Similar concerns plague restaurant operators such as the fast-food chain McDonalds.

The extreme price pressure is also causing difficulties for the central banks: interest rate hikes would curb inflation, but at the same time weaken the economy. In the worst case, the world is threatened with stagflation, ie a stagnant economy with sharply rising prices.

The stock markets are coping surprisingly well with the turbulence. The first shock after the Russian attack on Ukraine seems to be over. Since its low point in early March, the DAX has meanwhile gained 2,000 points. Around half of the gap to the record high has been closed.

In the cops’ scenario, the war in Ukraine is entering its final phase. A ceasefire would also calm the global economy and put it back on the path to recovery, possibly with additional support from new government stimulus packages. In this scenario, inflation would normalize or at least weaken.

The US investment strategists at investment bank Morgan Stanley are among the skeptics. There, the price recovery is seen as a market rally, i.e. a short-lived comeback within a longer-term downward movement. It is becoming increasingly difficult for investors to ignore the macroeconomic environment with a significant slowdown in the economy.

Inflation alone is not dangerous for the stock markets as long as the economy continues to grow. Because anyone who buys shares becomes a co-owner of a company and thus invests in real assets. Companies that manufacture coveted or necessary products can pass on rising costs to customers and thereby compensate for the effects of inflation. Those who stash their money in a bank account, on the other hand, will be hit with full force by the loss of purchasing power.

Commodity boom drives courses

Commodity stocks are the clear winners on the price list these days. Mining companies like Rio Tinto and oil giants like Chevron are likely to expand their profits this year thanks to the massive price increases. It is difficult to estimate how long the boom fueled by the war in Ukraine will last. In particular, European commodity stocks are still moderately valued despite the strong price gains with single-digit price-earnings ratios. This shows that a normalization of the prices is at least partly already reflected in the prices.

In the DAX, which has to do without classic commodity stocks, Bayer stands out this year. The Rheinlnder share has been banned from many depots due to the claims for damages against the agricultural group Monsanto, which was bought in 2018. This area of ​​all things is now becoming the course driver. With rising prices for agricultural products, Bayer should be able to push through higher prices for seeds and crop protection. According to management’s plans, the agricultural division will be the Group’s most important growth driver this year with sales growth of seven percent. The margin should also increase there.

Companies with pricing power are desirable in times of high and rising inflation. Many of these titles come from the area of ​​so-called quality stocks. It’s not about the mostly volatile and difficult-to-predict commodity prices, but about brand image and innovative strength, which companies translate into high margins and strong balance sheets. LVMH belongs to the group of quality stocks. At the heart of the French luxury goods conglomerate is the fashion and leather goods business with brands such as Louis Vuitton. The operating margin in this area was recently over 40 percent, for the entire group around 27 percent. This is made possible by the well-heeled group of customers who don’t have to pay attention to price tags.

Analysts report that it was not until mid-February that Louis Vuitton raised the prices of some handbag models by 20 to 25 percent. That’s a hefty premium even for a luxury brand, but it’s in line with the general trend. UBS analysts estimate that top brands in the luxury goods industry have increased prices by two and a half times the rate of inflation over the past 20 years.

Caught in the web

Apple demonstrates that you can achieve luxurious results with customers from all income brackets. The tech company sold its first iPhone in Germany at the end of 2007 for 399 euros. Today, the basic configuration of the top model costs more than three times as much as it did when it premiered. The iPhone has drawn many customers into the Apple world. With 1.8 billion active Apple devices worldwide, the group has a large group of customers to whom additional products and services can be sold. The deeper a customer dives into the universe, the greater the reluctance to switch to the competition. This also gives Apple leverage to push through further price increases. The EBIT margin was almost 30 percent in the past financial year.

Defensive protection for the depot

The healthcare sector offers an attractive mix in the current environment. Demand for medicines, consumer goods and medical services is largely independent of the economic situation. After operations were postponed during the pandemic, there is now a lot of catching up to do. Pharmaceutical companies and medical technology specialists should be able to compensate for rising costs because the competition in many categories is manageable.

That should also help Roche. Around 28 million people are treated with medicines from the Swiss pharmaceutical company. According to consensus estimates, more than a dozen of the active ingredients will bring in over one billion Swiss francs this year. The most valuable product is the MS drug Ocrevus with more than five billion. Even if the growth rates in the pharmaceutical industry seem unspectacular, many companies are popular as a defensive depot addition. In the case of Roche, the dividend history stands out. This year the group has increased its payout for the 35th time in a row. This also alleviates the pain of inflation.

INVESTOR INFO

On April 28, Apple wants to present quarterly results. After the strong growth in the pandemic, the momentum will weaken. For the fiscal year running until the end of September, analysts expect earnings per share to grow by almost ten percent. It will be important that the logistics are not slowed down too much by Covid restrictions. In terms of the chart, the share is also approaching a record high in dollars. A breakout would be a strong buy signal.

After the disastrous takeover of Monsanto, Bayer wants to look ahead. The legal problems are not out of the world, but now seem to be manageable. The sharp rise in agricultural prices is helping Bayer to sell crop protection and seeds. There has also been positive news from the pharmaceuticals business recently. The stock got off to a strong start in 2022, but is still cheap.

With its broad brand portfolio, the French luxury goods group is in a unique position. The margins are fantastically high, and brands like Louis Vuitton are coveted as prestige items even by younger consumers. Larger Covid lockdowns in China could cause short-term problems because the country is an important sales market for luxury goods. Drops in the stock remain buying opportunities for LVMH.

Many restaurants in the US are suffering from rising costs and a shortage of workers. McDonalds has experience in passing rising costs on to customers. The waning of the pandemic, particularly in the USA, should have a positive impact on business. The withdrawal from Russia, on the other hand, has only a small balance sheet effect. McDonald’s has been raising its dividend for the past 45 years. The stock remains a good defensive investment.

Pharmaceutical stocks are making a comeback as a defensive investment. Even in stagflation, companies like Roche should hold up well. After the group’s diagnostics division shone during the pandemic, the focus should now be on the core pharmaceutical business again. Roche aims to increase core earnings per share by a low to mid-single-digit percentage this year. The dividend yield is moderate, the payout is likely to increase further.

The British energy company has made an impressive turnaround: after a loss of almost $22 billion in 2020, Shell made a profit of more than $20 billion last year. The oil price is an important driver. The withdrawal from Russia, which now requires write-offs of up to five billion dollars, is manageable. Despite significant price gains, Shell’s shares are only trading at a single-digit price-earnings ratio. We see further potential.

Behind quality stocks are companies with high margins, strong balance sheets and reliable earnings trends. In an environment of rising costs and a cooling economy, such stocks offer above-average opportunities. Around 300 high-quality companies are bundled in the MSCI World Quality Index. Most recently, Apple, Microsoft and Nvidia were most heavily weighted in the share basket. Outside of the tech sector, Johnson & Johnson, Nike and Roche are prominently represented. Investors can invest inexpensively in the index via an ETF, such as that offered by iShares, among others.

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