According to J.P. Morgan, pricing power is cropping up as a corporate concern in the fledgling first quarter earnings season, with some major European companies flagging the issue during analyst calls.
J.P. Morgan made the comments on Monday while discussing equity strategy for earnings. The brokerage believes that a likely softening in pricing will be a theme for the season.
“The continued normalization of COVID distortions will likely mean weaker topline and pricing power. Other tailwinds of topline growth, like the unwind of pent-up demand, excess liquidity, and aggressive government spending are also likely now behind us,” Mislav Matejka, J.P. Morgan’s head of global equity strategy, said in a note.
The number of mentions of “pricing power” in company transcripts has been falling, and is now well below average, Matejka said. Moreover, J.P. Morgan’s analysis of transcripts and news found that pricing sentiment is “stretched,” guidance could be underwhelming, and companies may ramp up cost-cutting talk.
With pricing power likely to weaken, Matejka believes earnings projections may keep declining in 2024. First-quarter consensus projections have been moving materially lower over the past several months, with IBES calling for S&P 500 (SP500) profit growth of 3% year over year. That’s down from 10% to 12% growth projections last summer. For Europe, the first-quarter rate was a negative 11%, although the median number moved up to -1% year over year, given some significant outliers.
Additionally, the brokerage believes that earnings outperformance by US companies compared with Eurozone companies “might be ending,” with relative US-Eurozone Purchasing Managers’ Index momentum likely peaking. Topline beats for the US versus Eurozone may also be ending, with foreign exchange becoming less of a drag.
Still, a few European companies have outpointed mixed views on pricing, J.P. Morgan said. Here are some of those firms that have flagged pricing as an issue, as compiled by the brokerage:
- LVMH Moët Hennessy (OTCPK:LVMHF): the company behind Christian Dior and other high-end brands said it canceled price increases but will not introduce discounts.
- AstraZeneca (AZN): the Anglo-Swedish pharmaceutical giant said its performance in the most recent quarter was partially offset by last year’s mandatory price reduction in Japan and hospital-ordering dynamics in China. Another Japanese price reduction is expected later in 2024.
- Airbus (OTCPK:EADSF)(OTCPK:EADSY): the heavyweight plane maker is seeing “intense” pricing pressure on wide-body aircraft, although pricing in the A320 family is holding up. The company is taking a long-term view on pricing, booking planes now for the next decade.
- Schneider Electric (OTCPK:SBGSF): the French utility’s pricing actions in 2022 to counter the inflation adversely impacted gross margin last year. It sees pricing normalizing in 2024, with possibilities to drive it forward.
- Stellantis (STLA): automaker behind Peugeot and Chrysler sees market conditions leaving less room for price increases next year after full-year pricing improvements of 4% allowed it to offset significant FX headwinds.
- LANXESS (OTCPK:LNXSF)(OTCPK:LNXSY): the German chemicals maker in Q4 adjusted product prices for declining energy prices, and this is expected to continue in 2024.