Supply chain challenges for investors to consider while making investment decisions may seem daunting but they can be demystified.
The worst may be over for the COVOD-19-related supply chain crisis that surged across the global economy and helped fuel the worst inflation for the United States in 40 years. However, there continue to be inefficiencies in supply chains, which are the networks between companies and the suppliers that need to turn materials into the products they sell.
Supply chain issues have improved across the board, but getting back to pre-COVID levels is a multi-year task. Continue reading to discover the current supply chain issues in order to make well-informed investment decisions.
Supply Chain Challenges for Investors to Consider: Logistic Bottlenecks
Last year, two widespread signs of supply chain issues were empty shelves and marked-up prices. As companies scrambled to find ways to move inventory and make sales, shipping and logistics companies were in a sweet spot when it came to profits, even though they were unable to meet the unprecedented rapid surge of demand in the months of the pandemic recovery.
Shipping contract prices rose dramatically, with companies paying historically high rates to move their goods. Walmart (NYSE: WMT) and Target (NYSE: TGT) even started chartering private ships to stock shelves in preparation for the holidays. The rising cost to move goods was one avenue pressuring prices upward.
Now, a reduction in shipping and transportation jams has significantly helped ease global supply chain pressure. Shipping companies have added capacity through new ships they ordered, and travelers are flying again, bringing some cargo capacity through commercial airplanes back online.
Softening consumer demand has also played a role. Companies are no longer desperate to ship stuff as they were before. They have reached the level now where inventories are pretty solid.
As shipping fever has cooled off, so have the stock prices for major shipping companies, which made record profits at the height of the transportation bottleneck. It is likely that these companies are going to make the same or similarly big profits next year.
It is important to note that shipping delays remain large, with only 42% of goods arriving on time on average in the last three months. While this is up from the pandemic low of 30%, it’s far from the 2019 average of 78%. Shipping delays are expected to gradually recover in the next few years as freight rates continue to decrease.
Supply Chain Challenges for Investors to Consider: Semiconductor Shortages
Semiconductor shortages have plagued a number of industries, but the shortages now are mostly focused on older types of chips that are used in a number of industries including smartphones and network technologies.
As we enter 2023, we should see a situation where some of the capacity that is used for more mature chips, especially as demand for personal computers (PCs) and smartphones falls, can be shifted over and some of those chips can go toward industrial and automotive sectors.
The good news for industries in dire need of mature chips is that the smartphone, PC and data center markets have started to slow down in recent months. That slowdown should free up some capacity at foundries to produce more chips for industries like automobiles.
However, the slowdown in demand for PCs and smartphones manifests a problem for companies like Nvidia (NASDAQ: NVDA), Advanced Micro Devices (NASDAQ: AMD), and Taiwan Semiconductor Manufacturing (NYSE: TSM). These companies design and produce modern chips that are among the most lucrative to sell. These high-end chips are not in high demand now.
Nonetheless, the falling demand is good news for industries still struggling with shortages in semiconductors.
Supply Chain Challenges for Investors to Consider: Automobile Shortages
While supply chain disruptions have generally improved across the board, part shortages have stubbornly persisted for auto firms. The major issue is still chips and will remain that way for at least the first half of next year.
The shortages may have played into automakers’ favor this time around, however. With consumer demand softening, demand for vehicles may take a hit. But for an industry like autos where supply has been extremely limited and slow to climb back up, that is good news.
Experts are not worried that sales will collapse at this point, even if the United States enters a recession. The supply of vehicles is low enough that sales volumes could remain strong as inventory improves. In fact, third-quarter sales at Ford (NYSE: F) were up 17.3% year over year. General Motors (NYSE: GM) also reported a 24.3% increase in third-quarter sales from a year ago.
Supply Chain Challenges for Investors to Consider: U.S. Food Shortages
Shortages in the food industries, primarily those in the packaged foods space, remain prevalent because of supply chain issues. At the start of this year, there were widespread worries that Russia’s war on Ukraine would lead to food shortages. But that is not the driver.
Instead, what has been holding back packaged goods companies like McCormick (NYSE: MKC) or Campbell Soup (NYSE: CPB) is a lack of packaging supplies. Companies are not being able to find the packaging they need to put their products in.
Beyond packaging, supply chain issues have also served as a headache for packaged food companies in their efforts to expand manufacturing capacity. Those efforts were impeded by shortages in industries that would produce the necessary machinery for factory expansions, such as semiconductor undersupply for industrial firms.
The good news for packaged food companies is that while supply chain issues are creating higher input costs for them, consumers have been mostly receptive to price increases. This is one reason how these packaged food firms have been able to survive even with cost inflation. The sales volumes are not being hit to the extent that one would usually expect from the level of price increases that have occurred.
Supply Chain Challenges for Investors to Consider: Retailer’s Inventory
In a sudden reversal from their scramble to stock shelves in 2021, large retailers like Walmart and Target made headlines when they announced margins would be squeezed as they struggled to clear out excess inventory. Softer consumer demand led to a massive stock of items that buyers were no longer interested in.
In apparel, supply chain issues have become less intense. Inventory levels have improved for both apparel producers and retailers. While that’s generally great news for producers such as Hanesbrands (NYSE: HBI) and VF Corporation (NYSE: VFC), higher inventory levels may pressure the near-term margins of apparel retailers like TJX (NYSE: TJX) and Gap (NYSE: GPS). Retailers are expected to discount or hold inventory to next year in their efforts to get it back under control.
Nevertheless, the increase in inventory is not necessarily a bad thing. Back in 2021, product shortages left many failing to capture surging demand, but that is no longer the case. However, the concern for retailer stock investors is now reversed, with fewer product shortages but lower demand. More inventory has been available in 2022, yet sales have been rocky.
Supply Chain Challenges for Investors to Consider: The Bottom Line
Although the COVID-19 pandemic has exposed global supply chain issues, continued efforts are being made to restore it to pre-pandemic levels. However, with high inflation and a volatile stock market, being constantly aware of supply chain issues and outlook is even more important to make appropriate investment decisions.
Adam Johnson writes for www.stockinvestor.com.