BofA identifies companies where a key measure poses a risk to profits.
Wages are on the rise, with average hourly earnings jumping 5.2% in the 12 months through May.
Employee compensation, of course, is a major part of corporate costs. And rising costs can depress a company’s earnings. You might want to think twice about buying the stock of a company whose wage costs are cutting into profit.
“Wage inflation is a big risk to earnings, especially for labor-intensive businesses,” Bank of America strategists wrote in a commentary. They ranked S&P 500 companies by how labor intensive they are, measured by number of employees per $1 million of sales.
Here are the top 10. The statistic next to the name of the company is its number of employees per $1 million of sales.
1. Royal Caribbean (RCL) – Get Royal Caribbean Group Report, the cruise company: 55.3.
2. Norwegian Cruise Line (NCLH) – Get Norwegian Cruise Line Holdings Ltd. Report, the cruise company: 53.5
3. Robert Half (RHI) – Get Robert Half International Inc. Report, a recruiting firm: 27.9.
4. Hilton Worldwide (HLT) – Get Hilton Worldwide Holdings Inc. Report, the hotel company: 24.5.
5. Cognizant Technology Solutions (CTSH) – Get Cognizant Technology Solutions Corporation Report, a technology consulting company: 17.9.
6. Darden Restaurants (DRI) – Get Darden Restaurants Inc. Report, a restaurant owner, including Olive Garden: 16.9.
7. EPAM Systems (EPAM) – Get EPAM Systems Inc. Report, a software engineering company: 15.7.
8. Starbucks (SBUX) – Get Starbucks Corporation Report, the café chain: 12.6.
9. Chipotle Mexican Grill (CMG) – Get Chipotle Mexican Grill Inc. Report, the fast-casual restaurant chain: 12.5.
10. Carnival (CCL) – Get Carnival Corporation Report, the cruise company: 11.4.
Morningstar’s Take on Royal Caribbean
Morningstar analyst Jaime Katz assigns the company no moat and puts fair value for the stock at $80. It recently traded at $34.
“As travel constraints and hesitancy surrounding covid-19 continue to recede, consumer behavior about travel and social distancing have returned to normal for Royal Caribbean, paving a path to positive profits for the business,” Katz wrote in a commentary.
“With virus restrictions largely in the rearview mirror, Royal should see modest pricing gains as it digests bookings paid for with future cruise credits and takes new reservations,” Katz added.
“On the cost side, some health protocols and cruise resumption costs could inflate near-term spending, which could temper profitability until 2023.”
Morningstar’s Take on Robert Half
Morningstar analyst Joshua Aguilar gives the company a narrow moat and puts fair value for the stock at $88. It recently traded at $78.
“Robert Half will remain as one of the leading global staffing firms in a highly fragmented industry,” he wrote in a commentary. “The company places skilled professionals in accounting, finance, and information technology.”
Further, “we think its hold on small to mid-size businesses will persist, given its ability to fill open roles quickly, and the willingness of these businesses to sign exclusive contracts,” Aguilar said.
“We believe this will yield greater profitability for Robert Half, despite operating in a highly cyclical industry.”