Headed into the 2021Q4 earnings season, the materials sector had the 2nd highest revenue and earnings growth estimates. With companies in the sector now reported, we examine the results. Revenues were ahead of expectations as 75% of companies reported better than expected results and materials had the 2nd highest revenue growth rate (27.0%). However, materials had the lowest beat rate for EPS, with only 57% of companies beating and 36% missing. See Exhibit 1

Exhibit 1: S&P Earnings Scorecard as of 3/11/2022

Source: I/B/E/S data from Refinitiv

In Exhibit 2 we show materials sector EBITDA margins have been improving from pandemic lows and had reached record highs, before turning lower.  See Exhibit 2

Exhibit 2: Materials Sector EBITDA Margins

The pressure on margins should not be surprising given increased input costs and well-noted supply chain disruptions. Using the Earnings Calendar App (AdvEvents) in Refinitiv Workspace, we can search materials company transcripts for mentions of inflation or input costs. See Exhibit 3 below for an example.

Exhibit 3: Workspace AdvEvents App Search

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Source: Refinitiv Workspace

Further, once the search is complete, it’s possible to click through on the icon in the red box to see the direct quotes from the transcript. See Exhibit 4 below.

Exhibit 4: Edited Transcript Highlights

Source: Refinitiv Workspace

Below we provide additional examples of commentary from this past quarter’s conference calls:

…”raw materials and other costs inflation exceeded estimates…”

“…benefited from higher sales and increased selling prices, it was not sufficient to offset significant inflation, supply disruptions and operational inefficiencies caused by rapid increase in COVID cases within employee base, customers and suppliers…”

“…cost increased throughout year…higher input costs just in 2H21 resulting in significantly elevated input cost levels exiting 2021…”

“…given magnitude of inflation and lag in timing of price increases, margins moderated in 2H21…”

“…while pricing actions enabled Co. to maintain earnings, price/cost inflation resulted in significant headwind of about 150 BP to operating EBITDA margins vs. year-ago period…”

Despite the margin pressure and commentary on costs, the 2022 earnings estimate for the sector has improved over the past 6 months. The chart in Exhibit 5 below, reproduced from our weekly Earnings Scorecard, shows materials sector EPS improving even as EPS growth for the S&P has declined.

Exhibit 5: S&P 500 Sector Earnings Growth Estimates for 2022

The increase in EPS estimates for the sector can also be seen in the EARN app in Refinitiv Workspace. See Exhibit 6.

Exhibit 6: EARN App 20214Q Earnings Overview

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Source: Refinitiv Workspace

Refinitiv Workspace is a complete solution for research and analytics. It places the most comprehensive market information, news, analytics and trading tools available into a desktop.

In Exhibit 7 below, we add the YoY change in crude oil to the margins graph from Exhibit 2 to see the impact of rapid oil price increases. In the last period where oil prices increased by over 100% YoY, EBITDA margins declined by ~400 bps, continuing to decline even after oil prices peaked.

Exhibit 7: Materials EBITDA Margins vs. Oil Price Changes

Investors appear to be adjusting to this outlook and pulling money out of the materials sector index ETF (XLB). Using Lipper fund flows data, we can see that investors have pulled money from the ETF in four of the past 6 months, after adding for much of the first half of 2021. See Exhibit 8.

Exhibit 8: Materials Sector ETF (XLB) Fund Flows

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Source: Refinitiv Workspace, Lipper