Monday, February 13, 2023

In our previous post we examined the gross and operating profit margins at Google ($GOOG) to see what those disclosures might tell us about how well Google is handling cost pressures. (TL;DR — not great.)

Today we want to widen the lens, looking at the gross and operating margins for groups of companies. Can that tell us anything too?

Well, yes and no. First we used our Bulk Data Query tool to calculate the gross and operating margins for non-financial companies in the S&P 500 (roughly 400 firms in total) for the last four years. The result is Figure 1, below.

The most striking thing in the above chart is how gross margins held steady across the entire period — from the comfortable pre-pandemic times of 2019, through the pandemic in 2020, through the supply chain disruptions of 2021, through the inflation of 2022. (We ended at Q3 2022 because not enough Q4 filings have arrived yet.) Through all those gyrations, median gross margin was 38.3 percent, and no single quarter was more than 1.2 percentage points above or below that number.

Operating margins are a different story. Notice how they dropped sharply at the start of 2020, coinciding with all the new costs companies encountered as they scrambled to shift operating processes, cover expenses for dislocated employees, and so forth. Then operating margins increased in 2021 as covid’s economic turmoil receded, followed by a decline in margins in mid-2022 — which coincided with inflation’s high-water mark and employees in a tight labor market demanding more wages.

Except, let’s be honest here: across the entirety of the 15 quarters we examined, operating margins didn’t fluctuate all that much either. Yes, they seesawed in 2020 thanks to the pandemic; but operating margins were at 11.5 percent at the start of 2019. They were 12.9 percent in late 2022. That’s a notable shift upward, but not a huge one.

So perhaps the biggest lesson in looking at a broad group such as S&P 500 non-financials is that you can’t draw any clear conclusions. Some sectors  clearly have taken it in the teeth lately (lookin’ at you, tech sector), but others haven’t, and a 60,000-foot analysis like Figure 1 doesn’t reveal much.

In that case, if you want to do a margin analysis, you’re better off looking at specific sectors, or comparing one sector against another. (You can use our screening tools to establish whatever peer group you want, of course.)

Margins in the Tech Sector

Out of curiosity, we also looked at the collective margins for nine large tech companies:

  • AirBnB
  • Apple
  • Facebook (aka Meta)
  • Google (aka Alphabet)
  • Microsoft
  • Netflix
  • Pinterest
  • Salesforce
  • Uber

We excluded Amazon because it’s more a commerce company than a technology company; ditto for Tesla, which is a car company that depends on tech. The nine companies mentioned above are as close to pure-play tech firms as we could find.

Figure 2, below, shows the trend in margins for these firms.

This chart clearly tells a different story than Figure 1. For example, our tech group saw a larger increase in operating margins through latter 2020 and all of 2021. Even the decline in operating margins toward the end of 2022 is still appreciably higher than where margins were in 2019 before the pandemic.

On the other hand, gross profit margins declined in 2022 as inflation costs picked up. That’s a bit weird, since tech companies supposedly don’t rely on physical supplies as much as other sectors. So the data is calling out issues that might warrant further investigation, either by digging into footnote disclosures or asking firms what’s going on when you’re on the next earnings call.

Either way, studying the margins of a firm, or groups of firms, can help you better understand what’s going on with firms you follow in these tumultuous economic times. Calcbench has the data and tools you need to do that.

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