Entering earnings season, the profit margins of these stocks may help them outperform

With the earnings report in full swing, investors are focusing on companies that show a profit margin advantage in their earnings reports. Evercore ISI has found several great opportunities.

Julian Emanuel, senior managing director of the firm's Equities, Derivatives and Quantitative Strategy team, wrote in a note this week: "Given the record inflation backdrop and historically tight labor market, investors' focus is on profit margins – demonstrating pricing power to shift rising costs to customers. "

"The issue emerged in the company's earnings report in July, as core PCE inflation exceeded 3 percent," he wrote. "The 'obsession' with profit margins began with an earnings call in October as people realized that supply chain issues and labor market pressures would continue into 2022."

The company flipped through the October earnings call records of the S&P 500 constituents, highlighting companies that mentioned "margin advantage," "margin growth," "pricing power," and other similar key phrases.

According to the company's note, Evercore believes the stocks are expected to perform well in or after the fourth quarter of 2021 earnings report because they "have the ability to thrive in the new inflationary environment."

Here are 10 stocks that Evercore said had strong margins as they entered earnings season:

Most of the stocks on the list have outperform ratings, and they are consumer or industrial. Among consumer stocks, Chipotle Mexican Grill (CMG), DR Horton (DHI), McDonald's (MCD), and Lowe's (LOW) are among them.

On Chipotle's last earnings call, the company mentioned several uncertainties that have an impact on the business, including inflation, staff pressures and the COVID-19 pandemic. At the time, company CFO Jack Hartung said the burrito chain remained "confident in our ability and as our average number of units increases, we will drive restaurant margins up."

On the last earnings call, management at housing construction company DR Horton said increased demand for a limited supply of homes has allowed it to raise prices. Meanwhile, McDonald's management mentioned an increase in restaurant margins, while Lowe's raised its outlook for operating income margins.

In terms of industrial stocks, Caterpillar (CAT), Norfolk Southern (NSC), Union Pacific (UNP) and UPS (UPS) are some of the stocks to watch.

According to Evercore ISI, which quoted UPS management as saying, "When you add it all up, in Q4, we expect to generate record consolidated operating profit and expand operating margins, as well as year-on-year growth." I feel very good about our ability to manage through labor cost inflation, which a lot of companies struggle to do right now. "

This article originated from the financial world