Customer margin Deutsche
"The debate on S&P 500 net margins never seems to go away, " wrote Deutsche Bank's David Bianco.
Both Bianco and Suzuki concluded that margins were sustainable and were unlikely to collapse to historic means. This refutes the work of John Hussman and GMO's Jeremy Grantham, both who have warned that falling margins would crush profits and hinder the long-term returns on stocks.
It's All About Low Interest Expense And Low Tax Rates
"Importantly, roughly two-thirds of the improvement in net margins can be attributed to changes below the operating line, specifically interest expense and taxes, " noted Suzuki regarding the increase in margins since 1995. Suzuki went on to argue why interest expense and taxes were unlikely to rise anytime soon.
From David Bianco's study.Like Suzuki, Deutsche Bank's David Bianco also decomposed gains in profit margins since 1995. While Bianco's numbers are slightly different, his conclusions were essentially the same.
"Net margins are higher from structural factors... not cost cutting, " said Bianco.
Margin bears have been emphasizing how companies have improved profitability by laying off workers and squeezing the workers who they kept.
But the findings of Bianco and Suzuki show that that the bears' concerns are relatively small and more than offset by gains the forces of lower interest expense and taxes.
To get a better sense of this debunking, you need to look at operating margins, which are profits before interest and tax.
Bianco and Suzuki examined operating margins from different angles but nevertheless arrived at similar conclusions.
Tech And Energy Operating Margins
"S&P 500 Non-Financial operating margins are currently about 12.0% vs. their historical average of 10.6%, " writes Suzuki. "This is entirely due to increases in profitability and contribution from Tech and Energy."
Tech sector margins have benefitted from industry maturation. You see, young tech industries operate at losses or very slim margins as they get their companies off of the ground. Today, the once young tech companies have established themselves and built up the scale to maintain a higher level of profitability.
Energy is benefiting from massive structural changes. Back in the 80's and 90's, oil prices were at around $20/barrel. But thanks to emerging market demand, oil is trading around $90/barrel today. And oil prices and energy industry margins are very tightly correlated. Suzuki says that oil would have to plunge back to around $30 for margins to revert to a mean. This is unlikely.
NAB Lifts Cash Profit 7% To $1.6 Billion But Revenue Is Down — Business Insider Australia
This was partially offset by higher lending balances and a broadly stable customer margin.
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