Increasing margins is one strategy to create value for shareholders. It is not easy to accomplish, but it is arguably a more achievable objective than trying to lift sales growth at the same time as US economic growth decelerates. Roughly 45%of stocks in the Russell 3000index have 2023E net margins less than 10%. A company with margins in the 5%-10% range and expected 2023 sales growth less than 10% could roughly double its valuation if it could boost its margin above 10%. One margin-raising tactic for a company would be to divest a non-core business unit via a spinoff. We highlight 46stocks with margins and sales below their sector peers and market caps above $20bnthat could be candidates for “self-activism.
We are past the margin expansion phase of the early cycle. Ahead is, at best, is a mid-cycle adjustment and possibly worse if central banks bugger it up. Neither scenario recommends margin expansion. On the contrary.
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David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific's leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
