What’s the best way to combat higher expenses? Just pass the rise onto the customer, of course.
The post 3 ASX companies that can raise prices whenever they want appeared first on The Motley Fool Australia. –
Two of the big reasons why ASX shares have been so volatile this year are persistent inflation and rising interest rates.
Many experts say the most direct way to get around such headwinds is to invest in businesses that can set their own prices.
This can happen if the company provides a product or service so unique that there is not much competition, or its market share is so dominant that customers are unlikely to depart even if prices went up.
Such pricing power can offset higher supplier costs or interest rates, thereby preserving margins and earnings.
“As the inflation dynamic becomes more significant, the ability of companies to pass through input cost increases to their customers is one of the most significant themes for investors to understand,” said Martin Currie Australia chief investment officer Reece Birtles.
“Companies that have done well in this respect either have in-built inflation protections for their revenue streams and supply chains, or inflation leverage in their profit margins.”
Birtles then named three examples of ASX shares that fit this bill:
Product makers are naming their own prices, while service providers flounder
The first thing to note is that the type of business with pricing power seems to have changed in recent months.
“Until recently, service providers – typically growth-stye stocks – were more likely to be able to increase prices,” said Birtles.
“But now it is goods companies that appear to have a better ability to quickly pass through their input cost increases in a transparent manner.”
The shortage of labour in the post-COVID era is causing a bottleneck for service providers.
“Service companies are seeing higher costs in IT, compliance and wages, but with less price elasticity, meaning they cannot push prices up and still maintain sales.”
During last reporting season, Birtles’ team met executives of more than 100 companies to analyse how they’re coping with inflation.
The 3 ASX shares that stood out for him are:
Amcor CDI (ASX: AMC)
Scentre Group (ASX: SCG)
APA Group (ASX: APA)
Packaging maker Amcor has dealt with higher costs by increasing prices, but this has not affected sales.
“Due to the essential nature of the goods they sell, Woolworths Group Ltd (ASX: WOW) and other supermarket businesses are doing a solid job of holding their gross profit margins by passing through the rising cost of goods.”
Amcor shares are down 2.7% for the year so far.
Scentre operates the ubiquitous Westfield shopping malls in Australia.
“Accelerating inflation has been a positive for Scentre Group’s regional and super-regional shopping centres,” said Birtles.
“They have high tenant occupancy and rental contracts with CPI-adjusted lease renewal mechanisms.”
The Scentre share price is down more than 10% so far in 2022.
APA Group is an owner of gas infrastructure — a great position to be in during times of rising energy prices.
Utility and infrastructure companies often have contracts with clients that have inflation-linked price rises already baked in.
“Gas pipeline company APA Group’s operating expenses are a modest part of revenues, while revenue contracts are typically long-term take or pay with CPI-linkage mechanisms.
“As inflation increases, the dollar value of cash flow will increase.”
The APA stock price has gained more than 15% this year.
The post 3 ASX companies that can raise prices whenever they want appeared first on The Motley Fool Australia.
Wondering where you should invest $1,000 right now?
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*
Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.
*Returns as of January 12th 2022
Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns and has recommended APA Group and Amcor Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.