A Terrible New Profit Risk for Corporate America Has Surfaced

 | Feb 16, 2017 | 10:00 AM EST
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Attention, all lazy investors. You know who you are -- just riding the surging stock market without a care in the world, no appreciation for anything that looks like a new risk factor. Hell, dare I say you aren't even researching companies as hard as you did at Dow 19,000.

Here's a fresh risk you would be wise to put back on your radar screen after over a year of it being a non-factor. Good, old-fashioned inflation is picking back up across Corporate America and it's a major risk to juiced Wall Street profit estimates. Consumer prices rose 2.5% in January from a year earlier, the highest since March 2012.

Inflation expectations spiked in January vs. December (chart below), according to the University of Michigan. Oil prices have rallied about 18% since the November lows (thanks, OPEC). Action Alerts PLUS charity portfolio holding Apple (AAPL) is rumored to want to charge $1,000 for its iPhone 8, up from $800 or so currently (depending on model). Danone (DANOY)  warned on Wednesday of the crippling impact of milk price inflation.  

When I talked with PepsiCo's (PEP) Chief Financial Officer Hugh Johnson on Wednesday, that discussion revealed that the inflation topic is apparently so relevant that it played a hand in the soda and snacks giant taking a more cautious outlook on 2017 than Wall Street anticipated.

"It's [inflation] pretty broad-based across the agriculture complex. Most agriculture costs are moving a bit up. I think that's the biggest factor, in addition to energy while still low by historical standards, is up vs. the average from last year when it was all so deflationary. These are not huge changes. These aren't disruptive changes. But it's a bit of a shift, and we have anticipated it by virtue of having the forward buying program that we have on commodities. It allows us to plan both in terms of our pricing and where we need to source productivity to balance out our portfolio." -- PepsiCo CFO Hugh Johnston

Johnston told me PepsiCo raised prices earlier this year, as it tends to do, to counteract some of the inflation it was experiencing. He didn't say specifically for what product categories or the percentage of the increase, but it's something that consumers have likely seen in their weekly shopping visits of late. And PepsiCo isn't the only big company beginning to feel the heat from the old foe that is inflation. 

"It appears we've now reached the bottom on commodities and are likely to have to contend with commodity inflation beginning in the first quarter of this year. We're already seeing that [inflation] in cheese, coffee, bacon." -Kraft Heinz (KHC) CFO Paulo Luiz Araújo Basílio

"What we are expecting in 2017 is a more normal year [with inflation] at this point. We are only six weeks into the fiscal year, but we are thinking that commodity inflation will probably be 1% to 3%." -Denny's (DENN) CFO Mark Wolfinger

Keep in mind that this new inflation creep is happening before Trump outlines pro-growth measures such as tax cuts and infrastructure investments. If this isn't starting to freak out Janet Yellen and the Federal Reserve (maybe it is, she has sounded more hawkish of late) then perhaps there should be new people in charge. At the very least, it should concern investors who have already banked big on strong corporate profits this year.

Jim Cramer and the AAP team holds a position in Apple, Kraft Heinz and PepsiCo for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AAPL, KHC and PEP? Learn more now.

Cool Reads from Around the Web

You can officially buy a flying car: Dutch company PAL-V is now taking orders for the world's first commercial flying car called the Liberty, reported Motor Trend. The company says that the Liberty is fully compliant with safety regulations set by global governing bodies. Deliveries will begin by the end of 2018. The standard model costs $399,000, while a fancier one will set you back $599,000.

And you thought Tesla (TSLA) sold expensive toys. 

Yes, the mall is still slowly dying: Despite the repeated assertions of noted windbag CEO David Simon -- who sits atop mall owner Simon Property (SPG) -- the mall continues to die. This is the reality, born from the shift to shopping online and changes in how people consume -- not every mall and strip center is a sexy one parked in a rich metro area. There are so many crap malls left out there, it's disturbing. And look no further than mall staples GNC (GNC) and Build-a-Bear (BBW) to offer the latest reality check to blowhards like Simon.

GNC posted a monster $0.29 a share earnings miss for the fourth quarter. U.S. same-store sales dived 12%. The company suspended its dividend and will now look to shutter 100 stores. As for Build-a-Bear, its earnings missed estimates by a stunning $0.38 a share. The company largely blamed weak mall traffic during the holidays for an 8.3% same-store sales decline. 

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