Cost Pressure Effects "Stock Price Differentiation by Industry"... Focus on Industries Capable of Defending Profit Margins

[Asia Economy Reporter Lee Seon-ae] As the war between Russia and Ukraine deepens disruptions in raw material supplies, fueling inflation (price increases), cost burdens are expected to impact stock prices across industries.

According to the financial investment industry on the 7th, the consumer price index in March rose 4.1% year-on-year, marking the highest level in 10 years and 3 months. Beyond last year's 'demand-driven cost-push' inflation debate, some are now expressing concerns about 'stagflation,' where economic recession and inflation occur simultaneously. The Bank of Korea expects the annual consumer price increase rate this year to exceed the February forecast of 3.1%.

High prices affect the profit margins of listed companies. The domestic supply price index rose in February to levels seen in 2008 and is expected to impact companies' cost ratios with a time lag. The domestic supply price index is a figure indexed by including imported goods in the producer price related to companies' production costs. This tends to precede changes in cost ratios for manufacturing companies.

Choi Yoo-jun, a researcher at Shinhan Financial Investment, said, "As the trade balance turned to a deficit in the first quarter this year, price increases are expected to affect the first-quarter earnings season. The relatively weak rebound momentum of the KOSPI compared to global stock markets also reflects earnings season issues." He added, "The burden from rising costs is expected to vary by industry, and in a situation where inflationary pressure continues, the ability to defend cost ratios (cost of goods sold/sales) will be a factor differentiating stock prices."

Rising raw material prices are expected to particularly increase burdens on the utility and materials sectors. The utility sector, which uses primary energy, will see the largest increase in cost ratios, and the materials sector?including non-ferrous metals, lumber, chemicals, and steel, which process raw materials into intermediate goods?is also expected to see cost ratios rise year-on-year.

On the other hand, growth industries such as healthcare and software are expected to relatively easily defend their cost ratios. Shipbuilding and hotel & leisure sectors are expected to return to profitability this year, leading to a significant decline in cost ratios. Essential consumer goods, including food and beverages, will see the effect of price increases, but changes in cost ratios will vary by item due to rising agricultural product prices.

Researcher Choi said, "Attention should be paid to industries capable of defending profit margins," adding, "The difference between the year-on-year operating profit growth rate and sales growth rate can identify industries capable of defending profit margins." He cited media & education, distribution, information technology (IT), and secondary batteries (IT home appliances) as such industries. Additionally, stocks capable of defending profit margins include Samsung SDI, EcoPro BM, WiSol, Vieworks, Cheil Worldwide, CJ CGV, Lotte Shopping, Kakao Games, and Kangwon Land.

This content was produced with the assistance of AI translation services.