This year’s first-quarter earnings haven’t even been reported yet, but strategists are already looking ahead to 2022. And for good reason—that’s where the opportunity lies.
Earnings will be fantastic in 2021. How could they not be? Last year’s numbers were hit hard by lockdowns, while this year’s should be boosted by booming economic growth, thanks to widespread Covid-19 vaccinations, pent-up demand, and trillions of dollars of fiscal stimulus. Earnings for the
should hit $172 a share in 2021, up 25% from 2020, according to FactSet data.
Those kinds of comparisons will be hard to repeat, but 2022 shouldn’t be too shabby—in large part because many of the forces driving growth in 2021 will be repeated next year. Household savings, for instance, could hit $2 trillion by the end of the year, thanks to a rebounding jobs market and the stimulus, according to Morgan Stanley economists. And that’s too much money for consumers to exhaust in 2021 alone. “There’s going to be plenty of savings to deploy into 2022,” says Tom Porcelli, chief U.S. economist at RBC Capital Markets.
At the same time, corporations, after cutting capital spending in 2020, have started spending again. Citigroup estimates that companies will spend upward of $614 billion on capex in 2021, but that is still 6% less than in 2019, indicating that the rebound could extend into 2022. This shouldn’t be surprising, given eased lending standards and improved outlooks from CEOs, Tobias Levkovich, chief U.S. equity strategist at Citigroup, wrote in a recent note.
As a result, the U.S. economy should grow at a mid-single-digit rate, lower than 2021’s, but still faster than in any year during the past decade, while S&P 500 revenue is forecast to climb around 6%, down from the forecast 9% for 2021, according to FactSet. Earnings, though, are expected to grow by 15%, a rate rarely seen, even in the days before the 2007-09 financial crisis, thanks to the continued expansion of operating margins. Many S&P 500 companies are manufacturers, with fixed costs as a high portion of total expenses. That means for every dollar of additional revenue, there are more dollars of additional profits.
“The margins are a pretty important part of the story,” says David Lefkowitz, head of equities for the Americas at UBS Global Wealth Management.
Are they ever. Consider
(ticker: CAT). The manufacturer of diggers, bulldozers, and other heavy machinery, is forecast to grow earnings per share by 25%, to $8.20, in 2021, but that’s still well below its 2019 EPS of $11.06. Analysts expect earnings to rise by another 30% in 2022 to get back to within striking distance of previrus levels.
Sales, however, will only expand at a 15% clip in 2021, so the difference will be made up by operating leverage—since Caterpillar’s costs are fixed, its margins expand when sales grow. “As  unfolds, you’re going to see the speed of the recovery build,” says Edward Jones analyst Matt Arnold. “Next year, it’s going to be a continuation of that.”
That doesn’t mean Caterpillar stock is a bargain. At $225.29, it trades at 26.5 times 12-month forward profits, well above its five-year average of 18.3 times and a 25% premium to the S&P 500. Even at 20 times 2022 earnings—which some macro strategists see the S&P 500 fetching by year-end—the stock still looks expensive. Buying Caterpillar now, then, is a bet that its earnings will grow faster than expected, making its shares cheaper than they look.
Still, there are some economically sensitive stocks that do trade at tolerable multiples.
(BLMN), owner of Outback Steakhouse, Carrabba’s Italian Grill, and other restaurant chains, might have the kind of earnings growth that can overcome a slightly expensive valuation. The company is expected to see EPS of $1.11 in 2021, but that would still be lower than the $1.54 it reported in 2019. Analysts expect profits to grow by 81%, to $2.01, in 2022 to get the company back to its 2019 level—and then some. Like Caterpillar, Bloomin’, which trades at $28.37, will benefit from its operating leverage, as well as a $40 million cost-savings program, announced on its most recent earnings call on Feb. 18.
Read more Trader: The Market Isn’t Fighting the Fed. What That Means for Stocks.
And like Caterpillar, Bloomin’, at 24.2 times 12-month forward earnings, changes hands above its five-year average of 15.2 times, but at just 13.8 times 2022 numbers. That suggests that even if the company’s multiple slips, to say 20 times, the stock could still gain more than 40%.
In addition, “you can argue that the multiple could expand coming out of Covid for them, relative to historical levels because they become a more profitable business,” says Credit Suisse analyst Lauren Silberman.
With such strong economic tides, some stocks still have plenty of upside.
Write to Jacob Sonenshine at firstname.lastname@example.org