US profit margins might not be all they seem

| Multi-actifs

US profit margins might not be all they seem

Profitability of US firms in aggregate has been quite healthy post-2009, as margins bounced back and reverted to pre-crisis levels. However, breaking down profitability of firms by their market capitalisation shows that the aggregate picture is masking weakness in smaller firms.

This chart splits the universe of Russell 3000 firms, representing about 98% of the entire US equity market, into quintiles by their market capitalisation and looks at the aggregate profit margin for each of these quintiles.

The 1st quintile, corresponding to the smallest firms, has an average market cap of USD 200 million, while the large cap firms in the 5th quintile have an average market cap of around USD 24 billion (and a maximum around USD 1trillion). While there are a few interesting dynamics, one that is especially worth highlighting is the growing dispersion between the profit margins of small versus large firms, indicated by the blue shaded region. While it is not surprising that large firms are more profitable than smaller firms, it is noteworthy that the spread between the profit margins is growing. Typically, the spread is around 10%, except during recessions when it can widen significantly, as small firms struggle to remain profitable during a downturn and large firms benefit from scale and global exposure. However, since 2012 this spread has grown despite continued economic expansion. Thus, while large firms may be able to weather margin contraction or a meaningful economic slowdown, smaller firms, especially the smallest 40%, are at substantial risk.

20190627 chart website
Source: Unigestion, Compustat. Data as at 27 June 2019.


Important Information

The information and data presented in this page may discuss general market activity or industry trends but is not intended to be relied upon as a forecast, research or investment advice. It is not a financial promotion and represents no offer, solicitation or recommendation of any kind, to invest in the strategies or in the investment vehicles it refers to. Some of the investment strategies described or alluded to herein may be construed as high risk and not readily realisable investments, which may experience substantial and sudden losses including total loss of investment.

The investment views, economic and market opinions or analysis expressed in this page present Unigestion’s judgement as at the date of publication without regard to the date on which you may access the information. There is no guarantee that these views and opinions expressed will be correct nor do they purport to be a complete description of the securities, markets and developments referred to in it. All information provided here is subject to change without notice. To the extent that this page contains statements about the future, such statements are forward-looking and subject to a number of risks and uncertainties, including, but not limited to, the impact of competitive products, market acceptance risks and other risks.

Data and graphical information herein are for information only and may have been derived from third party sources. Although we believe that the information obtained from public and third party sources to be reliable, we have not independently verified it and we therefore cannot guarantee its accuracy or completeness. As a result, no representation or warranty, expressed or implied, is or will be made by Unigestion in this respect and no responsibility or liability is or will be accepted. Unless otherwise stated, source is Unigestion.

Past performance is not a guide to future performance. All investments contain risks, including total loss for the investor.