Profit margins always face a challenge. 5 actions to consider.

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Business costs are rising too quickly. This reduces profit margins, which investors can avoid by choosing companies with the highest pricing power.

With the help of Wolf Research, we set out to find companies that managed to increase their gross margins even as the pandemic withered large swathes of the economy.


Tapestry

(ticker: TPR),


Coca Cola

(KO),


Philip Morris International

(MP),


Altria Group

(MO) and


Nvidia

(NVDA) are our top five. More on them later.

Many businesses struggle to fully pass the higher costs on to their customers. The producer goods price index, which measures the cost of acquiring materials by businesses, rose 13%, about double the increase in consumer prices. This is the largest percentage point difference between the two indices since the 1970s.

Admittedly, the aggregate operating margin on the


S&P 500

increased from second to third trimester. But this is due to the government’s extraordinary stimulus measures and pent-up demand from consumers who were unable to spend freely during the early days of the pandemic. Margins would be much better without the higher costs.

As the supply situation improves, some indicators such as the sharp increase in producer prices in China point to further difficulties. “Our forward-looking indicators strongly suggest that producer prices will continue to rise,” wrote Chris Senyek, chief investment strategist at Wolfe Research.

Enter the pricing power stocks. These companies are generally the most competitive in their industry and can therefore increase their prices more easily if necessary.

Wolfe Research selected these stocks by first looking for S&P 500 companies with gross margins in the richest 20% of their industries over the past three years. A company with a higher gross margin than its competitors often increases its profitability by increasing its prices because its products are superior. Of those companies, Wolfe only included those that increased their gross margins in the second quarter compared to the second quarter of 2019 – or before the pandemic, indicating that cost pressures have not hampered improvement. profitability.

Here are 5 actions on the screen:

Tapestry, owner of the Coach, Kate Spade and Stuart Weitzman brands, saw its gross margin climb to 72% in the second quarter, from 67% in the same quarter in 2019.

Coca Cola increased its gross margin to 63% in the second quarter, above 61% in the same period in 2019.

Philip Morris International increased its margin to 70% from 65%.

Altria Group increased its margin to 66% from 64%.

Nvidia increased its margin from 60% to 65%.

These actions have an additional advantage over others on the screen. They are largely not economically sensitive. People still drink Coke during a recession. So if high inflation persists and the Federal Reserve is forced to raise interest rates, any potentially weaker economic demand won’t do much harm to sales for these companies.

Write to Jacob Sonenshine at [email protected]

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