Two big tech earnings reports came out, and they both discussed the supply chain in very different ways. This creates a real dilemma for investors: Which of these companies do you believe?
Last night Qualcomm (QCOM) announced a top and bottom line beat of estimates and, more significantly, strengthened their guidance for this year. They were able to do that because, as management explained in a subsequent earnings conference call, they saw improvements in supply chain issues over the last quarter, and expected those improvements to continue.
This morning, we got the other side of the story. Honeywell (HON) reported earnings that were roughly in line with expectations, but on slightly weaker than anticipated revenue. In addition, they issued guidance for the year that was below the Street’s forecast. They said that reason for the miss and the disappointing outlook was at least in part due to supply chain issues, which are still bad and show no signs of improving.
So which is it? Are supply chain issues getting better or not?
The first thing to understand is that “supply chain issues” is this quarter’s buzzword (or buzzphrase, I suppose), and any mention of the supply chain is tailored to suit an individual company’s situation. Before earnings season began, I indicated in this piece that talk of supply chains and uncertainty around covid should both be taken with a pinch of salt when mentioned as a reason for below-par performance or guidance. This is nothing new; the only thing that really changes is subject of these warnings. A Republican/Democratic President, a strong/weak dollar, high/low oil prices, climate change, Brexit, and a whole host of other excuses have been used at different times in the past to explain weak results or guidance. They all seemed relevant at the time and maybe they actually really did have an impact, but all these warnings came and went.
Don’t get me wrong, I’m not saying that there aren’t serious supply issues at the moment for a lot of companies, Honeywell included. It’s just that CEOs are human and, like the rest of us, are subject to the assumption that current conditions will persist into the future. However, that usually isn’t the way it works out. Problems, particularly supply problems, get solved. The solution may be the result of market forces, or policy changes, or just fortuitous circumstance, but there will be a solution before long when resources are being misallocated.
As to what investors should believe — the positive outlook from Qualcomm or the more pessimistic one from Honeywell — there are good reasons to favor Qualcomm’s positivity beyond the fact that they will inevitably be right at some point.
As a chip maker and supplier to the mobile device and computer industry, they are further up the supply chain than Honeywell, a consumer of those chips. Nor are they alone in their industry in the view that improvements are coming. Another chip maker, AMD, also gave positive guidance when they reported earnings on Tuesday, implying that they’re not worried about their supply chain either. Over the past six months or so, we have frequently been told that chip shortages are the biggest issue facing manufacturers of everything from computers to cars, so if chip makers are seeing easier conditions when it comes to supply, it is only a matter of time before everyone else does too.
For opportunistic investors, that means taking a closer look at a stock like HON on the drop. Lower guidance always puts pressure on any stock, but if the main reason for caution turns out not to be too much of a problem, a bounce back will come. I am not jumping in straight away and buying HON this morning, however. It may take a while for supply chain improvements to show at the end of the chain and, in the meantime, there will still be the negative impact from downward earnings revisions as analysts adjust to the new guidance. Once that passes, though, HON at or below its levels a year ago will look very tempting, as will other stocks that drop on warnings of continued supply chain issues.
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