Has the moment finally arrived when profit margins start reverting to mean? David Rosenberg, Chief Economist and Strategist of Gluskin Sheff & Associates, seem to think so and argues his case below.
We saw more evidence that companies are facing an intense profit margin squeeze with the recent macro data. The chart below is the spread between Philly Fed prices paid (input costs) and received (prices charged). The last time the spread was at 46.2 was in June 1979 … that was not a good foreboding: the four-quarter EPS trend swung from +21% to -9% a year later. The producer price index data told the same story on margins — the ratio of PPI at the crude stage to PPI at the final gate just broke above 1.3x … there were only three other episodes where this ratio was above 1.3 … in each case, EPS growth slowed substantially all three times in the next year.
Click to enlarge:
Source: David Rosenberg, Gluskin Sheff & Associates – Breakfast with Dave, February 18, 2011.