DuPont benefits from pricing power

E.I. DuPont de Nemours & Co, or DuPont, (DD) reported strong earnings results on Tuesday. DuPont generated $7B in revenue, a 17% year-over-year increase for the third quarter.

DuPont has six business segments. Each one generated year-over-year revenue growth in the third quarter. Four of the six experienced positive pricing power: Electronics & Communications, Performance Chemicals, Performance Coatings, and Performance Materials. Only Safety & Protection experienced downward pricing pressure (hurting net sales gains by 1 percentage point), and Agriculture & Nutrition was (surprisingly) flat.

Pricing power was strong even in the U.S. The U.S. generated 31% of DuPont’s revenues for the quarter, 5 percentage points of the 17% increase in sales came from pricing.

As a result, DuPont is bullish about its outlook and expects its positive pricing power to continue (emphasis mine):

“The company expects full-year earnings to be about $3.10 per share, excluding significant items which will include a fourth quarter $.13 per share loss on the early extinguishment of debt. The previous guidance range was $2.90 to $3.05 per share. The increased outlook reflects strong third quarter results and expectations for sustained demand in key global markets, continued pricing momentum and benefits from ongoing productivity.”

Steel companies squeezed by lower product prices and higher input costs

A common theme has connected the earnings reports of most steel companies: lower prices for many steel products and higher input costs. This margin squeeze has produced poor earnings, and steel companies are providing very cautious outlooks. While pricing for steel products varies – some strong, some weak – the increasing cost pressures are near universal. Inflation is very real for these companies.

Arcelor Mittal (MT), AK Steel (AKS), and U.S. Steel (X) all reported this week. I have included some quotes from their earnings report to provide some examples of the pressures that these companies face.

Arcelor Mittal

“In Q3 the business performed towards the lower end of our expectations against a background of seasonally lower volumes, weakening spot prices and higher costs. Our outlook for Q4 remains cautious as the expected higher input prices continue to work through the business and demand remains muted, though with some regional differences.”

“Sales were lower during the third quarter of 2010 as compared to the second quarter of 2010 due to seasonally lower volumes (-8%), partly offset by higher average steel selling prices (+4%).”

“Sales in the Stainless Steel segment were $1.4 billion for the three months ended September 30, 2010, a decrease of 12% as compared to $1.5 billion for the three months ended June 30, 2010. Sales declined primarily due to lower steel shipments (-8%) as discussed above and lower average steel selling prices (-5%) due to a weak market environment and pressure from imports.”

AK Steel

“The company said its average selling price for the third quarter of 2010 was $1,075 per ton, a 2% decrease from the $1,101 per-ton price in the second quarter of 2010, and approximately 8% higher than the $994 per-ton average price realized in the third quarter of 2009.”

“2010 Iron Ore Price Increase Impacts Third Quarter:
AK Steel said that it has agreed with two of its three primary iron ore suppliers that the requirements for the establishment of the annual benchmark price of iron ore for 2010 have been met. That 2010 benchmark is an increase of 98.65% over the 2009 benchmark, and is higher than the 65% increase the company had previously estimated for the first half and for its third quarter guidance. The third primary supplier of iron ore to the company has not acknowledged yet that an annual benchmark price has been established. Instead, that supplier continues to seek a price increase in excess of the 98.65% annual benchmark price. The company does not agree that this supplier has a right under the parties’ contract to charge based on other than an annual benchmark price and, for purposes of the iron ore purchased from this supplier, the company has used an estimated benchmark price increase of 98.65% in its third quarter financial results.”

“The company’s third quarter 2010 financial results reflect the year-to-date impact of the higher iron ore price, which increased the company’s third quarter operating loss by approximately $76.0 million, or $52 per ton.”

“AK Steel said it expects shipments of approximately 1,300,000 to 1,350,000 tons for the fourth quarter, with an average selling price per ton decrease of approximately 4% from the third quarter. While the company expects fourth-quarter maintenance costs to decrease by about $20 million from the third quarter, it nonetheless expects to incur an operating loss of approximately $80 per ton for the fourth quarter of 2010, largely due to the lower shipments and selling prices combined with continued high iron ore and other raw material costs.”

U.S. Steel

(Quotes transcribed and paraphrased)

“Results declined in 3rd quarter from 2nd from lower flat-rolled average prices, higher raw material costs in flat-rolled segment and European operations: decreased shipments and production volumes, decreased average realized prices, increased costs for facility repair and maintenance (higher activity, not input costs), and consumption of higher cost coal, coke and iron ore purchased to support earlier facility restarts. Decreased spot prices more than compensated for increased contract prices.”

“In 4th quarter, expect lower average realized prices, lower spot and contract.”

“Tubular operations had higher average prices for fifth quarter in a row. Decreased costs for steel substrate. Not expecting same price performance in 4th quarter but costs should continue down.”

Disclosure: author owns X and AKS

Party like it’s 1999!

If Google wants to provide free servants to its employees, that’s fine by me. (Hey, I’m a happy GOOG shareholder.)

But we here at Inflation Watch would be remiss if we didn’t notice that something interesting is going on in the Silicon Valley labor market.

As Gawker reports:

Tech companies in recent months have reported a shortage of programmers as they snap up more and more talent. Google and Facebook are competing so fiercely over some engineers that half-million-dollar retention bonuses are not unheard of. And they’re not the only ones vying for talent; flush with venture capital, Twitter is on a hiring spree, as are AmazonFoursquareZynga and other startups.

Hiring sprees? Free servants?  Half-million dollar retention bonuses? Doesn’t sound like a deflationary spiral to me.

Tuition costs outpace inflation again

According to the NY Times, The College Board’s annual report shows tuition costs at public and private universities outpaced inflation yet again this year:

“…four-year public universities increased their published tuition and fees almost 8 percent this year, to an average of $7,605, according to the College Board’s annual reports. When room and board are included, the average in-state student at a public university now pays $16,140 a year. At private nonprofit colleges and universities, tuition rose 4.5 percent to an average of $27,293, or $36,993 with room and board…
…Over the last decade, published tuition and fees at public four-year colleges and universities increased each year at an average of 5.6 percent beyond the rate of inflation.”

The spiraling cost of higher education has arguably been supported by generous federal assistance:

“In the last five years…average published tuition and fees increased by about 24 percent at public four-year colleges and universities, 17 percent at private nonprofit four-year institutions, and 11 percent at public two-year colleges — but in each sector, the net inflation-adjusted price, taking into account both grants and federal tax benefits, decreased over the period.”

These pricing dynamics show an increasing shift of funding for public higher education from states to the Federal government.

Toyota may raise prices to counter weak yen

As the dollar weakens, Americans are likely to pay more for goods imported from other countries. Thus, it is not surprising to learn that Toyota is mulling higher prices for autos it exports to the U.S. MarketWatch:

Toyota Motor Corp.  is considering raising the prices of some of its export models in the U.S. to counter the impact of the strong yen, the Yomiuri Shimbun reported in its Wednesday morning edition. The company may raise the prices of some of its 2012 export models–including the Prius hybrid, the Corolla and upscale Lexus models–which go on sale in the U.S. from next year, the report said. But to stop the move having an overly negative effect on sales, the automaker will raise prices by only a few percent, the report added.

Related: Nintendo swings to a loss, in part because of the stronger Yen.

Jones Group, VF Corp. plan to raise clothing prices

Dow Jones Newswire reports that two apparel companies are planning to hike prices in response to higher commodity costs:

Jones Group Inc.’s (JNY) disappointing third-quarter results sparked a sell-off in the apparel sector Wednesday, as soaring raw material costs weighed on margins and sparked fears ahead of a slew of upcoming earnings reports in the group. Apparel makers and retailers had generally been optimistic about how they plan to mitigate rising raw materials costs. Cotton prices, for one, have repeatedly reset all-time highs in recent weeks as uncooperative weather in key cotton-producing regions has squeezed inventories since the beginning of the year But fears were stoked Wednesday after Jones Group’s margins contracted to 33.5% from 35.6% due to the higher costs. Cotton prices, meanwhile, hit an all-time record high of $1.305 a pound on Tuesday. Jones Group shares tumbled 22.6% to $15.10 in recent trading, dragging down other apparel stocks such as VF Corp. (VFC), Liz Claiborne Inc. (LIZ), Volcom Inc. (VLCM), Guess Inc. (GES) and Hanesbrands Inc. (HBI), all of which were down between 3.5% and 7% on higher-than-average trading volume… Jones Group Chief Executive Wesley Card said on a conference call that the company will look to offset the higher cotton costs by raising prices on its products–considered risky with continuing signs of belt-tightening among consumers. Similar concerns are haunting apparel company VF Corp. During its third-quarter earnings call last week, Chief Financial Officer Richard Shearer noted cotton prices are likely to rise to higher levels than the company envisioned, and it’s planning for selective price increases.

Jones Group has a bunch of brands I’ve never heard of. VF Corp. makes Lee and Wrangler Jeans.

Big Oil reports higher earnings due to higher energy prices

Yahoo! News:

Royal Dutch Shell Plc beat all analyst forecasts by reporting an 18 percent jump in third-quarter profits thanks to higher oil and gas prices, setting a trend for the sector… ConocoPhillips, the third-largest U.S. oil company, said on Wednesday that its quarterly profit more than doubled. Both companies were helped by a 12 percent rise in crude prices compared to the third quarter of 2009, while U.S. natural gas prices were 29 percent higher and British gas prices doubled.