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Inflation and supply issues are among the buzziest words on Wall Street as the third-quarter earnings reporting season approaches, with investors waiting to see which companies were the best at managing surging cost pressures and shipping disruptions.
UBS strategists believe one of the best ways to deal with these headwinds is for a company to raise prices, but not all companies can do so by enough to make a real difference without losing customers.
A number of companies in different sectors have already cut forward guidance, given rising costs and supply-chain disruptions, such as FedEx Corp.
FDX,
Nu Skin Enterprises Inc.
NUS,
and Dollar Tree Inc.
DLTR,
Third-quarter earnings season kicks off in earnest next week, with aggregate earnings per share of the S&P 500 companies
SPX,
expected to show year-over-year growth in earnings per share of about 27% and in sales of about 15%.
Also read: Investors are paying up for stocks where company profit resists squeeze from inflation, says strategist.
Read more: Stocks will be volatile until they can prove their inflation resilience, these strategists say.
“Pricing power should be an even more important theme for relative returns with surging shipping costs, rising raw materials, supply chain issues and accelerating wage growth,” UBS strategists wrote in a note to clients this week.
So the strategists, led by Keith Parker, asked UBS analysts across 33 industries to identify companies with the strongest relative pricing power. The analysts were also asked to pick out companies that scored in the top third of their respective sectors based on UBS Equity Strategy’s composite score for pricing power, margin momentum and input cost exposure; have “buy” ratings; and have stocks with at least 10% upside potential to their respective price targets.
Here are 10 “high conviction, strong pricing power stocks” on UBS’s list that have about 20% upside to the analysts’ stock price targets, in alphabetical order:
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Advance Auto Parts Inc.
AAP,
+1.09% ,
with a price target of $255, which implies an upside of about 21% to Wednesday’s closing price. Analyst Michael Lasser said he believes the auto parts company’s (AAP) aftermarket fundamentals are in a strong position, and that a gradual increase in mobility and a return to working in offices should drive further recovery in vehicle miles traveled.
“The auto parts sector traditionally has strong pricing power, with an ability to pass along price increases to customers,” Lasser wrote. “Plus, AAP also have the largest exposure to the commercial segment of the market, which is viewed even more favorably.”
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Apple Inc.
AAPL,
+0.63% ,
which has a price target of $175 that implies 23% upside. Analyst David Vogt said the combination of its technological capability, supported by its retention metrics from UBS surveys that indicate high customer satisfaction for Apple products, suggests the PC and smartphone giant’s brand equity should drive adoption in the battery-electric-vehicle (BEV) market.
“End-market demand has been improving year-over-year, leading to elevated ‘wait times’ despite increased product procurement/production,” Vogt wrote. Regarding the BEV market, Vogt said that while Apple isn’t a first mover, “its significant resources should enable the company to be a ‘fast follower,’” similar to when it entered the smartphone market in 2007.
-
CME Group Inc.
CME,
+0.20% ,
with a price target of $245 implying 23% upside. Analyst Alex Kramm said the derivatives trading platform benefits from global expansion, innovation, adoption of options and pricing. And he believes regulation could provide a tailwind to growth.
“As primarily a U.S. futures business, CME enjoys the highest barriers of entry in the space,” Kramm wrote.
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Danaher Corp.
DHR,
+0.36%
has a price target of $365, which implies 21% upside. Analyst John Sourbeer believes the medical products and services company (DHR) is “very well positioned” within the life sciences tool and services sector, as COVID testing should hold up much better than peers and the vaccine and therapeutic opportunity appears durable.
“DHR sales engine is able to proactively identify areas of potential pricing pressure and [successfully] navigate customers to high-value product,” Sourbeer wrote.
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EOG Resources Inc.
EOG,
-0.61%
has a $119 stock price target that suggests 37% upside. Analyst Lloyd Byrne the oil and natural gas exploration company is well positioned to mitigate inflationary pressures expected next year given well costs that are expected to be flat to lower in 2022 because of reduced drilling days, the deployment of “super zipper fracs” and contracts negotiated at lower rates.
“Pricing power in commodity companies is difficult to achieve. Those that can hold margins by best controlling costs, though, are better positioned,” Byrne wrote. “EOG is better positioned than most by being proactive with input and service costs, while excelling in operations.”
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Extra Space Storage Inc.’s
EXR,
+1.57%
stock price target of $210 implies 23% upside. Analyst Michael Goldsmith said he believes strong underlying demand, in conjunction with decelerating supply growth, support rent growth.
“Strong demand for self storage and elevated occupancy rates, combined with its non-discretionary nature increased pricing power of the operators,” Goldsmith wrote. “Operators are flexing their pricing power to new customers, as well as existing customer rent increases every 9-12 months.”
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Generac Holdings Inc.
GNRC,
+0.54%
has a price target of $500, which implies 23% upside. Analyst Jon Windham believes the power generation equipment maker’s competitive edge lies in its customer acquisition platform, which should enable it to take market share from incumbents SolarEdge Technologies Inc.
SEDG,
+0.66%
and Enphase Energy Inc.
ENPH,
+4.19%
“Dominant market share (~80%) and strong demand for home standby power have insulated already high residential product margins,” Windham wrote.
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Nike Inc.’s
NKE,
-0.44%
price target of $185 implies 24% upside. Analyst Jay Sole said a UBS survey and pricing data reveal that the Nike brand currently is No. 1 in mindshare globally and the sports apparel and accessories company has significant room to reduce promotions.
“We believe the market doesn’t fully appreciate how Nike’s investments in product innovation, supply chain and e-commerce are working in concert to drive unit growth and [average selling price] increases,” Sole wrote.
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Salesforce.com Inc.
CRM,
+1.29%
has a stock price target of $330 that implies 20% upside potential. Analyst Karl Keirstead said the customer relationship management software company appears to be moving well beyond the previous era of limited operating margin expansion, and committing to boosting annual operating margins.
“Importantly, the drivers behind the improved margin outlook strike us as sustainable, with topline outperformance, a permanent shift towards WFH [work from home] and Zoom-based customer interactions, and renewed expense discipline internally…the three biggest drivers,” Keirstead wrote.
- Teleflex Inc.’s price target of $480 implies 27% upside. Analyst Matthew Taylor said the medical technology products company makes a number of inexpensive products that fly under the radar, given them the opportunity to increase prices.
Taylor said he believes margins can go “significantly higher” over the long term, given the company’s leverage to both necessary and elective procedures, which should return quickly in a post-pandemic world.
