The U.S. labor market defied expectations and registered another strong month of growth in November, the Labor Department said Friday. That’s good news for the economy, but at some point higher labor costs may start to nibble away at corporate margins, meaning not-so-good news for shareholders.
Goldman Sachs strategists on Monday published an analysis of the impact of labor costs on companies in the S&P 500. The analysts forecast margins will fall in 2019, but recover, a bit, in 2020. “Continued wage and input cost pressures will limit margin expansion to just 13 (basis points) in 2020 and 5 bps in 2021,” the analysts wrote.
It’s worth noting that Goldman’s forecast for corporate growth is based on reporting by publicly traded companies, not on the profit information published by the government in its National Income and Profit Accounts reports. The NIPA reports shows a sharper deterioration in profits than what companies are reporting, the analysts note, which could be concerning because “NIPA profit margin declines have typically preceded S&P 500 margin declines, as in the lead-up to the Tech Bubble.”
Goldman dismisses those concerns, noting that NIPA data “reflects all companies, large and small and public and private.” That means those reports includes data from small, less profitable companies, which may have little bearing on the companies that investors find most interesting. Still, labor costs remain a critical part of stock selection, they conclude.
The Goldman analysts screen the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.18% for the 50 stocks with the lowest labor costs as a share of sales, based on the number of employees the company has and its median employee compensation, as disclosed in proxy filings. In the 50-stock basket, the median stock has labor costs equal to 5% of revenues, compared with 13% of revenues for the entire S&P 500.
The table that follows has Goldman’s top pick for each sector, although in some cases, such as Materials, only one company is listed.
|Sector/Company||YTD Return||Consensus 2020 EPS Growth||Labor Cost as % of Revenue|
|ViacomCBS Inc. /zigman2/quotes/200340870/composite VIAC||-5%||17%||2%|
|Under Armour Inc. /zigman2/quotes/204420722/composite UAA||6%||41%||3%|
|Archer-Daniels-Midland Co. /zigman2/quotes/203479136/composite ADM||9%||27%||3%|
|Cabot Oil & Gas Corp. /zigman2/quotes/205804016/composite COG||-27%||-24%||1%|
|Everest Re Group Ltd. /zigman2/quotes/200609425/composite RE||26%||3%||3%|
|AmerisourceBergen Corp. /zigman2/quotes/201066379/composite ABC||20%||6%||1%|
|C.H. Robinson Worldwide Inc. /zigman2/quotes/203490767/composite CHRW||-8%||-2%||6%|
|Apple Inc. /zigman2/quotes/202934861/composite AAPL||71%||11%||3%|
|Avery Dennison Corp. /zigman2/quotes/200970384/composite AVY||47%||8%||5%|
|Host Hotels & Resorts Inc. /zigman2/quotes/201760234/composite HST||10%||-3%||1%|
|Pinnacle West Capital Corp. /zigman2/quotes/202967011/composite PNW||5%||4%||0%|
|Source: Goldman Sachs analysis|