Gross margins are rolling over, but net margin expectations remain high
Median gross margins for the Top 500 peaked at 46.4% in Feb 25 and have since fallen to 44.9% in Jan 26, yet bottom-up forecasts imply continued strong net income growth - likely reflecting embedded AI-driven productivity assumptions. Historically, Trivariate finds valuation multiples correlate more closely with gross profit growth than net income growth, implying further multiple expansion will require renewed gross margin strength or a structural shift in how markets reward earnings. Their quantitatively derived longs (e.g. Merck, T-Mobile, McDonald’s) have had recent multiple expansion and are forecasted to have margin expansion, but not more net margin than gross margin expansion. While shorts (e.g. Amphenol, Salesforce, Arista Networks, Las Vegas Sands) screen for gross margin contraction but net margin expansion, reducing estimate achievability.
Edition: 231
- 06 March, 2026
Consumer Discretionary
Despite the Marina Bay Sands in Singapore putting up all-time high EBITDA and a full recovery in Macau visitation, Sands stock has traded poorly this year. The reason has been concern about the Chinese economy. Sands China, the company that owns just under 30% of Las Vegas Sands’ Macau assets has fallen more than 40% since Feb. With Aug visitation in Macau above 2019 levels, strong performance in the high-margin mass and premium mass business, and just a few months remaining to finish a big renovation project, LVS just bought back $103m of Sands China stock bringing its stake to 72%. With over $1bn in capital returned to shareholders this year, DKI believes management is displaying confidence based on excellent fundamental results.
Edition: 195
- 20 September, 2024