Rising inflation is understandably shaking up S&P 500 investors. But it’s not much of a problem for a handful of companies already showing enviable pricing power.
Eight non-financial companies in the S&P 500, including materials company Freeport-McMoRan (FCX), forest real estate firm Weyerhaeuser (WY) and health care company Hologic (VRTX), are displaying remarkable price strength going into this period of higher inflation, says an Investor’s Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith.
All these companies keep at least 30 cents on every dollar of revenue after paying their direct costs like materials costs, or gross margin. But that’s not the most notable part. Additionally, their gross margins also rose more than 9 percentage points in the past 12 months from 2019 levels.
Such pricing power stands to help these companies withstand rising prices, whether it’s mild and temporary or more dramatic.
Investors are already trying to decide how high inflation will get. And they’re looking for companies most able to pass it along. “Current fiscal and monetary policies likely means that inflation data will continue to surprise to the upside,” said Nancy Davis, founder of Quadratic Capital Management.
S&P 500 Braced For Inflation
Inflation was already surging higher. But more alarming now is that people expect it to continue sharply upward. Inflation expectations can steer purchasing and pricing decisions.
A survey in the University of Michigan’s index of consumer sentiment shows consumers are bracing for a 4.8% jump in cost of living this year. That’s the highest reading since 2008.
Inflation can squeeze companies. Hurt most are companies forced to pay higher prices for materials, but unable to hike prices they charge their customers.
So, pricing power can help S&P 500 companies hold up their profit margins. That’s been a key piece of the S&P 500’s soaring profit this year. Nine S&P 500 sectors, including financials, industrials and materials, are expected to post higher net profit margins in the second quarter of 2021 from the same period a year ago, says John Butters, earnings strategist at FactSet.
But which S&P 500 companies are already showing the most pricing power?
You’ll Pay Up for Freeport-McMoRan’s Wares
Freeport-McMoRan is a copper, gold and silver miner. And if you want what it’s selling, you’d better prepare to pay up.
The company kept nearly 39 cents in gross profit from every dollar of revenue in the past 12 months. That in itself isn’t all that unusual. It’s roughly in line with the 44.5 average gross margin of non-financial companies in the S&P 500. But what is notable is the fact Freeport-McMoRan’s gross margin is up nearly 20 percentage points from 2019. That’s a larger jump than any other S&P 500 non-financial company.
Much of its pricing power is due to massive demand for copper. Copper mining accounts for roughly half its revenue, says S&P Global Market Intelligence. And the cash price of copper is pushing $9,450 per metric ton. That’s up more than 50% from its low point in the past year.
Seeing such pricing power doesn’t surprise investors. Shares of Freeport-McMoRan are up more than 27% this year so far. That outpaces the S&P 500’s 15.2% gain.
The Prescription For S&P 500 Pricing Power
When it comes to pricing power, you can’t put a price on good health. And half of the eight S&P 500 companies with the most pricing power hail from the health care sector.
Consider Hologic, the maker of medical tests for women. It commands an impressive 73.8% gross margin. That’s well above the norm in the S&P 500. And that’s up more than 12 percentage points from an already solid 61.5% in 2019.
That pricing power, too, should start to flow to investors. Analysts think the company will earn $7.71 a share this year. That’s up more than 90% from 2020. The stock is down 5% this year to 69.54. And yet, analysts think this will be an 82-a-share stock in 12 months. If that’s right, it’s nearly 18% upside.
Not everyone, though, sees inflation as a lasting issue. Rising prices are mostly due to “supply chain bottlenecks” and should “resolve themselves,” said Ryan Detrick, chief market strategist at LPL Financial.
“The elimination of supplemental unemployment benefits in September should help increase the supply of labor,” he said. “Our view (is) that inflation will eventually prove to be transitory.”
But if not, some S&P 500 companies are ready to push the higher prices along to you.
S&P 500 Companies With The Most Pricing Power
Gross margin is at least 30%, and up more than 9 percentage points from 2019
|Company||Ticker||Sector||Stock YTD % ch.||Gross margin last 12 months||Ch. gross margin from 2019 (in percentage points)|
|Vertex Pharmaceuticals||(VRTX)||Health Care||-14.4||59.4||14.7|
|Laboratory Corporation of America||(H)||Health Care||35.8||38.4||10.2|
|Enphase Energy||(ENPH)||Information Technology||-6.9||44.6||9.2|
Sources: IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
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