Morgan Stanley says rising wages are squeezing corporate profits — use these 3 simple stocks to defend against it

“The record-breaking pace of the economic recovery has come with very fast wage growth,” the Wall Street giant writes. “If we are right, monetary and fiscal policy will henceforth create persistently tight labor markets, meaning that the case for a structural uptrend in wages — and therefore the labor share of income — is strong.”

That doesn’t bode well for corporate bottom lines.

“In our top-down economic model, the full convergence of real wages with productivity implies that the economy-wide pretax profit margin declines to 10.7% from 17.8% today.”

That said, Morgan Stanley also identifies several companies with material upside and far less exposure to higher labor costs.

Here’s a look at three of them.

Nike (NKE)

Sports apparel and footwear giant Nike has been a popular stock for investors. Over the past five years, shares have climbed more than 140%.

Management is also returning cash to investors. In the most recent quarter, Nike paid out $484 million in dividends to shareholders — up 12% from the prior-year period.

Those dividends are backed by a profitable business. For the quarter, Nike earned a profit of $1.4 billion. Meanwhile, its revenue grew 5% year over year to $10.9 billion.

Morgan analyst Kimberly Greenberger is confident in Nike’s ability to deliver strong earnings despite rising wages in the U.S.

“We expect Global Brands to be relatively insulated from wage inflation given lower store counts and high revenue penetration in the wholesale & eComm channels,” she writes. “Additionally, revenue exposure to international geographies could help alleviate pressures from US wage inflation.”

Greenberger has a price target of $192 on Nike — about 44% above where the stock sits today.

Knight-Swift Transportation Holdings (KNX)

Knight-Swift is in the freight transportation business, providing multiple truckload transportation and logistics services throughout North America.

Having Knight-Swift on this list may seem counterintuitive because pay raises have been common in the transportation industry amid the driver shortage. But Morgan analyst Ravi Shanker sees the company coming out just fine.

“While TL driver wages have seen some of the sharpest increases over the last two years, KNX's relatively low exposure to wage-driven costs as a % of revenues and remarkable pricing power (evidenced by EBIT growth 2x the group average) should position them well to navigate wage inflation,” he says.