Let's focus today on a phenomenon that is making headlines: wage increases. In a context of inflation and economic recovery, professionals report difficulties in recruiting, unless they pay the price. Especially for the lowest paid positions. What would the impact of a wage increase be on companies that employ a lot of low-skilled employees? The research firm AlphaValue has looked at companies belong to the sectors of personal care, security, distribution, logistics and hospitality in the broad sense (hotels, restaurants, etc.). They have models that are obviously labor-intensive, with consequently high fixed costs and low margins. "Well managed, the profitability of limited capital can be superb, but there is a fine line between operating at full capacity and breaking down," says AlphaValue, which explains why governments immediately came to the rescue of these sectors.
The question now is whether these companies, which have "socialized" their losses, should not pass them on to their employees. In reality, they may not have a choice. But it will have an impact on their business model. AlphaValue has calculated that a 3% wage increase over the average of the supposedly roughly normal 2019 and 2021 years could cut the free cash flow generated by a third of the companies surveyed by more than 15%. For investors, this is a parameter to keep in mind.
This perspective illustrates the kind of constraints that macroeconomics can exert on business models, which are not all equal in the face of a strong recovery. Speaking of macroeconomics, this week looks like it will be a busy one. Yesterday, China, facing a demographic crunch, allowed couples to have three children, which could have important implications in many areas, from economics to geopolitics to the environment. Today, OPEC+ meets to talk production as economies rebound, oil returns to its best levels since 2019, and Iran could get back in the game. At the end of the week, the G7 is reportedly expected to outline an ambitious tax plan to ensure that multinationals cannot evade taxes.
Economic highlights of the day:
The final manufacturing PMIs for May are scheduled for Europe and the US. Also on the agenda are German and Eurozone employment, as well as construction spending and ISM manufacturing in the US. This morning, the Australian central bank maintained the status quo on its monetary policy. In Japan, the May manufacturing PMI was slightly higher than the first reading, while China's (Caixin PMI) was slightly weaker, but still expanding.
The dollar is at EUR 0.8181. The ounce of gold is trading at USD 1908. Oil continues to gain ground, at USD 71.15 a barrel of Brent and USD 68.61 a barrel of WTI. The yield on US debt rallies slightly to 1.62% on the 10-year. Bitcoin rebounded yesterday, before retreating slightly today to USD 35,984.
* Intel - Chief Executive Pat Gelsinger said Monday that it could take several years to overcome the global semiconductor shortage.
* The Boeing Company - Cowen & Co raised its recommendation on the aerospace and defense giant to "outperform" from "market perform" and raised its price target to $290 from $240. The stock gained 1.7% in pre-market trading.
* Abbott Laboratories announced Tuesday that it has lowered its annual profit forecast due to an expected decline in sales of coronavirus tests. The stock is losing 4.1% in pre-market trading.
* Tesla- The electric carmaker's higher selling prices are the result of supply chain strains across the auto industry, especially for raw materials, Chief Executive Elon Musk said Monday on Twitter.
* Amgen gained 1.7% in pre-opening trading after announcing a partnership agreement with Japan's Kyowa Kirin to treat atopic dermatitis.
* 3M - The U.S. court ruled in favor of the industrial group accused of concealing design flaws in earplugs used by the military, a first victory for 3M, which was facing 230,000 similar complaints.
* Goodyear- The U.S. tire maker faces charges of unpaid wages, illegal overtime and threats against foreign workers at its Malaysian plant, show excerpts of the lawsuit and complaints from workers.
* Goldman Sachs will double its real estate investments in Japan to about 250 billion yen ($1.9 billion) a year, a source close to the matter said Monday.
* Cloudera - The software company announced Tuesday an agreement on its buyout by KKR and Clayton Dubilier & Rice LLC (CD&R) for $5.33 billion. Cloudera shares jumped 25.7% in pre-market trading.
Today's analyst recommendations:
- Cooper : Piper Sandler changes PT to $440 from $435, maintains Overweight rating
- Devon Energy : Raymond James upgrades to Strong Buy from Outperform, PT to $40 From $34
- Domino's Pizza : Barclays raises PT to $414 From $395, keeps Equal-Weight rating
- easyJet: UBS lowers its recommendation to Neutral versus Buying. The target price remains unchanged at GBp 1125.
- Jack in the Box : Barclays lifts PT on Jack in the Box to $129 from $117, keeps Equal-Weight rating
- McDonald's : Barclays adjusts PT $283 from $270, maintains Overweight rating
- Restaurant Brands International : Barclays lifts PT to $77 from $73, maintains Overweight rating
- Royal Mail: Citigroup remains Buy with a price target raised from GBp 635 to GBp 1000.
- The Boeing Company: Cowen upgrades Boeing to Outperform from Market Perform, Price Target raised to $290 From $240
- The Cheesecake Factory Incorporated : Barclays adjusts PT to $51 from $54, maintains Underweight rating
- The Honest Company: Loop Capital initiates coverage at Hold with $15 Price Target
- The Wendy's Company: Barclays adjusts PT to $29 from $27, maintains Overweight rating
- Valneva : Goldman Sachs starts Valneva SE at Buy with $34 Price Target
- Victrex: HSBC upgrades from "light" to "hold" targeting GBp 2,450.
- Yum! Brands : Barclays raises PT to $121 From $115, keeps Equal-Weight rating
- Williams-Sonoma : BofA Securities upgrades Williams-Sonoma to Neutral from Underperform; Price Target is $180