Few companies have issued guidance in July, but trends as of now indicate optimism — management has continued to guide above analysts’ raised expectations. Of the Banks that reported last week, responses to questions on tariffs/trade indicated no significant changes in consumer behaviour or impacts to businesses so far. Given that a trade war – and its potential impact to global growth – is a risk to the global S&P 500, we are monitoring guidance/commentary closely for any signs of deteriorating outlooks.
That’s from BofAML’s Savita Subramanian, out last Monday, and in case it isn’t clear enough, the implication is that although trade-related guidance cuts and profit warnings haven’t yet begun to come in fast and furious, it will be important to monitor Q2 earnings for signs that the trade frictions are starting to weigh on the outlook.
Of course it’s not as if some companies haven’t already suggested that the Trump administration’s trade policies risk denting corporate profits. General Motors and Harley-Davidson have warned about the possible impact of the tariffs on U.S. investment spending and jobs and Alcoa cut guidance last week, citing the impact of the trade restrictions.
Meanwhile, foreign companies like BMW and Daimler have pulled no punches when it comes to communicating the idea that protectionism represents a clear and present danger, with the former telling Wilbur Ross that U.S. jobs are at risk and the latter being the first major company to cut guidance on trade concerns.
Last Friday, Goldman explained that margin pressure could begin to materialize as input costs rise and wouldn’t you know it, Whirlpool missed nearly everything when it reported after hours on Monday.
Sales were $5.14 billion versus consensus of $5.29 billion, and on the bottom line, the company missed by a country mile, with Q2 EPS coming in at $3.20, some $0.35 below the lowest estimate.
Worse, FY guidance for ongoing EPS is now in the $14.20-$14.80 range, down from $14.50-$15.50 in April and again below even the lowest full-year estimate.
If you read the press release, “raw material inflation” shows up all over the place and accounted for 200 and 225 bps worth of drag on EBIT in EMEA and Asia. Higher input costs were also a factor in North America. Apparently, the company expects to take a ~$350 million hit on that this year:
The tragic irony here is that back in January, the company announced plans to add some 200 jobs following Trump’s imposition of tariffs on imported residential washing machines. Here’s what Whirlpool said at the time:
This is a victory for American workers and consumers alike. By enforcing our existing trade laws, President Trump has ensured American workers will compete on a level playing field with their foreign counterparts, enabled new manufacturing jobs here in America and will usher in a new era of innovation for consumers everywhere.
Fast forward to April and they were forced to admit that Trump’s steel and aluminum tariffs were contributing to an increase in input costs.
CEO Marc Bitzer said the following on the Q1 call:
Over the last few months, raw material costs have risen substantially and as a result we are revising our raw material inflation guidance for 2018 by approximately $50 million to a range of $250 million to $300 million primarily due to previously announced U.S. tariffs on steel and aluminum. In addition to existing steel and aluminum tariffs, there continues to be uncertainty regarding potential future tariffs and trade actions. We will continue to monitor, evaluate and take the right actions for our business in these areas.
So their projections for raw materials inflation have increased by $50 million from Q1 to Q2, and that’s if you take the high end of last quarter’s range as the baseline.
Shares careened nearly 10% lower in after hours trading on Monday afternoon.