Turn on the financial news, and a topic you'll most likely hear about is the status of the global supply chain. The unexpected surge in consumer demand following the depths of the pandemic in 2020 has caused shipping delays, labor shortages, and inflation. As investors, it can be difficult to make sense of it all.
Luckily, a team of Motley Fool contributors has identified three top stocks to consider that can handle the pressing supply chain challenges. Find out why they think Expedia Group (NASDAQ:EXPE), Home Depot (NYSE:HD), and Walmart (NYSE:WMT) are good long-term bets.
Fly away with this high-potential stock
Eric Volkman (Expedia Group): Several corners of the travel industry might be struggling at the moment -- hello, Southwest Airlines! -- but by and large these difficulties aren't due to the global supply headaches. Meanwhile, the anticipated big-time recovery in the sector, which was widely expected to kick in several months ago as the coronavirus pandemic seemed to be receding, is now right in front of us.
So a good play on these dynamics is top online travel agency Expedia Group, which as a stock has been showing new signs of life recently. That should roll on, as delta variant coronavirus cases and deaths continue to drop, and travel restrictions are eased.
Many would-be travelers didn't get a sufficient window of opportunity to venture out of their homes between the original decline in cases and deaths earlier this year and the rise of the delta variant. The persistence of delta has bottled up demand even more; one can imagine bookings for flights, hotels, tours, etc. will explode when the world opens up.
Also, travel is a bug that tends to produce a lifetime fever. So, many first-time or relatively inexperienced travelers will become more habitual voyage-takers (and returning Expedia customers) as they get opportunities in the future.
These dynamics provide much room for recovery and improvement. In the second quarter of 2019, before the pandemic, Expedia's gross bookings totaled over $28 billion, from which it rang up nearly $3.2 billion in revenue. In the same quarter this year, those tallies were a respective $20.8 billion and $2.1 billion.
I think that hunger for travel is stronger than many investors realize. Consequently OTA travel king Expedia could not only rise to those pre-pandemic numbers before long, but exceed them handsomely.
Many analysts tracking the company agree. On average, according to data compiled by Yahoo! Finance, they're anticipating that Expedia will post its second-highest annual revenue figure of all time in 2022 (almost $11.5 billion, not far from current record holder 2019's $12 billion and change).
And their estimate for adjusted earnings per share? A cool $6.58, which tops banner 2019's $6.15.
Regardless of whether supply chain disruptions persist or perish, formerly shut-in people with cash to spend will find a way to travel. Expedia is one of the top companies helping them to do so, and as such it's poised to be a real winner of a stock in the near future.
Taking advantage of scale in the home improvement space
Neil Patel (Home Depot): With a market capitalization exceeding $360 billion and trailing-12-month sales of $144.4 billion, Home Depot is one of the largest businesses around. This sheer size is a big reason why it's able to deal with the current situation.
Thanks to investments the company has made over the years, Home Depot's One Supply Chain is passing the real-life stress test of the past few months in flying colors. Management's primary objective right now is to focus on maintaining enough inventory of the most in-demand SKUs, which include products that its professional (or Pro) customers really need, like lumber, building materials, and electrical and plumbing fixtures. Growth of the Pro customer group outpaced that of DIYers for the past two quarters, so keeping up with this demand is hugely important.
In order to completely bypass the issues other companies are facing, Home Depot took matters into its own hands. "Our supply chain teams recently leveraged our scale and flexibility to arrange for several container vessels for our exclusive use," chief operating officer Ted Decker highlighted on the Q2 earnings call. Home Depot's financial strength, supported by an operating margin of 37.5%, a net income margin of 12.6%, and an interest coverage ratio (earnings before interest and taxes divided by interest expense) of 20, provide significant room to handle any short-term issues. And it clearly allows the business to afford excess capacity.
Over the past year, Home Depot grew sales by 8.1% and inventories by 40%. The company's ability to stock up on merchandise at a faster rate than revenue, particularly in this type of economic environment when moving goods through the supply chain has proven very difficult, is a nod to Home Depot's operational excellence.
The leading home improvement chain makes for a case study in how to deal with these disruptions.
More concentrated than you think
Jeremy Bowman (Walmart): Supply chain woes are hammering retailers across the board as a combination of factory shutdowns, shipping delays, COVID-19-related issues, and labor shortages are making it harder than ever for retailers to keep their stores stocked.
As the world's largest retailer, Walmart isn't immune from the supply chain crunch, but it has a number of advantages that make it less vulnerable to the global supply chain slowdown than you might think.
First, because of its size, Walmart has significant economies of scale, meaning it's better equipped to manage challenges like these than smaller retailers. Suppliers want to maintain strong relations with Walmart so they're likely to favor it over independent retailers if they have limited inventory, and Walmart's size and balance sheet mean it can make sacrifices that smaller competitors may not be able to.
Second, though Walmart is a diversified retailer, selling things like clothing, home goods, and electronics, a majority of its sales comes from groceries, which are less sensitive to the supply chain challenges for several reasons. Everybody needs to eat, after all, and if one brand's product is out of stock, consumers will likely just substitute another.
Finally, Walmart and other large retailers like Costco Wholesale and Home Depot are taking it upon themselves to make sure they have adequate inventory by chartering their own container ships. It's an expensive option, but a smart one to ensure that in-demand merchandise is in stock, especially with the holiday season coming up. That, again, is something only large retailers do.
The supply chain woes are an industrywide problem, and Walmart's size and competitive strength give it an opportunity to pick up market share during a challenging time.