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When it comes to inflation, there’s no shortage of blame to go around.
First, the pandemic broke the global supply chain. Then stimulus payments set off a frenzy of consumer spending at a time when finding toilet paper at the local grocery store wasn’t a given.
But from the halls of Congress to Main Street, fingers also point at corporate America.
Greedy companies, by this telling, have raised prices above and beyond their rising costs of production.
Companies, of course, deny this. It’s a serious allegation, even though there’s research to back up the claim. Nevertheless, rising profit margins may look suspicious, but they aren’t themselves evidence of companies taking advantage of high prices to fatten their coffers.
So Forbes is tracking who’s piling up the profits and, more importantly, how they did it. To do so, we’re looking at changes in operating margin, a measure that narrowly gauges how much money companies make from selling their products.
“Operating margin excludes financing costs,” Wayne State University finance professor Mai Iskandar-Datta told Forbes. “Essentially, you’re trying to have a broader picture of company performance. You’re trying to see how they’re doing without considering financing. It separates financing and investment decision-making.”
Here’s the top five as it stands now, with about half of the S&P 500 having reported third-quarter earnings:
Natural gas company EQT Corp. tops the list. Its operating margin surged from 20.3% for the 12 months ending in September 2021 to 64% over the last year. The 64% is more than 20 percentage points greater than the company’s prior all-time high set in 2015. EQT didn’t respond to a request for comment.
How They Did It: A new addition to the S&P 500 Index, EQT is the largest producer of natural gas in the U.S. As the price of natural gas spiked in the wake of Russia’s unprovoked invasion of Ukraine, so did EQT’s revenue. On its earnings call and in its investor presentation, the company cited cost reductions at its West Virginia wells and the impact of acquisitions as reasons it’s piling up the cash.
The operating margin of pharmaceutical giant Merck jumped by 20 percentage points for its last 12 months compared to the year prior. At a 35% operating margin, Merck’s take on revenue is as high as its been since 2004, according to FactSet data. Merck didn’t respond to a request for comment.
How They Did It: Merck’s spending on research and development and restructuring costs dropped by about 16% over the last year, according to FactSet data. That’s roughly in line with the 20 percentage point gain in operating margin over the same period.
Biogen, the pharmaceutical company that’s made its name treating multiple sclerosis, saw its operating margin jump from 3.4% for the 12 months ending in September 2021 to 22.2% for the most recently completed 12 months. Biogen declined to comment.
How They Did It: Call it a comeback. Biogen’s margins plummeted throughout 2021. According to FactSet data, it was just eking out a profit last year. While sizable, the pharmaceutical giant’s operating margin is about half of what it was before the pandemic. “In 2021, there’s a bunch of things that happened on a GAAP basis,” Myles Minter, a research analyst at William Blair, told Forbes. “They were going through a major drug launch for Alzheimer’s disease. They were building inventory and a salesforce to back that up. It was an absolute flop of a launch.” Minter added that Biogen’s increasing margins are the result of cutting spending rather than bringing in more money. “They can’t price gouge because they have generic competition,” said Minter.
Hess, the New York-based energy company, saw its operating margin rise from 23% for the 12 months ending in September 2021 to 36% this year. That’s the highest margin on record for the company, according to FactSet. Prior to this year, the previous high watermark was 22% in 2014. Hess didn’t respond to a request for comment.
How They Did It: Like other energy companies, Hess is cashing in on the higher prices brought on by the war in Ukraine. For its exploration and production segment, the company said in its latest investor presentation that the uptick in quarterly profit as compared with the year prior was the result of “higher realized selling prices and sales volumes.” On Hess’ earnings call, chief executive officer John Hess singled out the company’s investment in Guyana, which he called “one of the industry’s highest margin, lowest carbon intensity and highest growth oil and gas prospects.”
Another energy company, Pioneer Natural Resources, rounds out the current top five. Pioneer saw its operating margin jump by 12 percentage points for the 12 months ending in September as compared to the year prior. With a 43% operating margin for the period, Pioneer set a new company record. However, it’s just slightly higher than what the company recognized throughout the first decade of this century. Pioneer didn’t respond to a request for comment.
How They Did It: Noticing a trend yet? In its most recent investor presentation, Pioneer touts “high realized pricing and low cash costs” as drivers of the company’s “best-in-class operating margins.”
“It’s a good time to be a refiner,” said Ed Hirs, an energy fellow at the University of Houston. “First and foremost, quite a few refineries are offline in Europe because they’re not getting Russian oil anymore. And over the last three years, we’ve lost a million barrels of day of refining capacity in the U.S. U.S. companies today have run down their inventories so they’re really benefiting from the market dislocation. Primarily because they’ve built inventories and can now sell it at a higher price.”
Our Methodology
We’re looking at rolling 12-month changes in operating margins for S&P 500 members. Using FactSet, we gathered the profit margins for the most recently reported year for companies with data as of September 2022. We then compared that to the 12 months ending at this same time in 2021.
Our focus is on those companies that sell products we all buy. Therefore, banks and other financial firms were excluded from our calculations, while companies in sectors like oil and gas, retail and pharmaceuticals remained.
We also eliminated companies that weren’t profitable in 2021 and 2022. So, for example, cruise operators and much of the airline industry were ruled out.
One more thing: We’ve solely relied on values following generally accepted accounting principles (GAAP).
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Source: https://www.forbes.com/sites/brandonkochkodin/2022/10/28/here-are-the-companies-that-have-profited-the-most-during-inflation/