Here are 10 ‘high conviction’ stocks of companies with strong pricing power and at least 20% upside potential over UBS targets.
Inflation and supply issues are among the hottest buzzwords on Wall Street heading into the third quarter earnings season, with investors waiting to see which companies have been best at handling growing pressures on costs and disruption to shipping.
UBS strategists believe that one of the best ways to deal with these headwinds is for a company to raise prices, but not all companies can do it enough to make a real difference without losing customers.
A number of companies in different industries have already cut their forecasts, given rising costs and supply chain disruptions, such as FedEx Corp. FDX,
Nu Skin Enterprises Inc. NUS,
and Dollar Tree Inc. DLTR,
The third quarter earnings season kicks off in earnest next week, with aggregate earnings per share of S&P 500 SPX companies,
is expected to show year-over-year growth in earnings per share of around 27% and sales of around 15%.
Read also: Investors pay for stocks where corporate earnings resist inflation pressure, strategist says.
Read more: Stocks will be volatile until they can prove their resistance to inflation, these strategists say.
“Pricing power is expected to be an even more important theme for relative returns with soaring shipping costs, rising raw materials, supply chain issues and accelerating wage growth,” said wrote UBS strategists in a note to clients this week.
The strategists, led by Keith Parker, therefore asked UBS analysts from 33 industries to identify the companies with the highest relative pricing power. Analysts were also asked to select companies that ranked in the top third of their respective industries based on the UBS Equity Strategy composite score for pricing power, margin dynamics and cost exposure. inputs; have âbuyâ odds; and have stocks with a potential upside of at least 10% from their respective price targets.
Here are 10 âhigh conviction, high pricing power stocksâ on UBS’s list that are at least 20% above analysts’ stock price targets, in alphabetical order:
Advance Auto Parts Inc. AAP,
with a target price of $ 255, which implies an increase of about 21% from Wednesday afternoon prices. Analyst Michael Lasser said he believes the fundamentals of the auto parts company (AAP) aftermarket are in good shape and that a gradual increase in mobility and a return to work in offices should lead to a new recovery of kilometers traveled by vehicles.
âThe auto parts industry has traditionally had strong pricing power, with the ability to pass price increases on to customers,â Lasser wrote. “In addition, AAP also has the greatest exposure to the commercial segment of the market, which is viewed even more favorably.”
Apple Inc. AAPL,
which has a target price of $ 175, which implies a 24% hike. Analyst David Vogt said the combination of its technological capabilities, supported by its retention measures from UBS surveys that indicate high customer satisfaction with Apple products, suggests that the PC and smartphone giant’s brand equity should stimulate market adoption of battery electric vehicles (BEV). .
âEnd market demand has improved year on year resulting in high ‘wait times’ despite increasing product supply / production,â Vogt wrote. Regarding the BEV market, Vogt said that although Apple is not a forerunner, “its significant resources should allow the company to be a” quick follower “”, as when it entered the market. smartphones in 2007.
CME Group Inc. CME,
with a price target of $ 245 involving a 23% hike. Analyst Alex Kramm said the derivatives trading platform benefits from global expansion, innovation, adoption of options and pricing. And he thinks regulation could spur growth.
âAs a futures company in the United States, CME enjoys the highest barriers to entry into the space,â Kramm wrote.
Danaher Corp. HRD,
has a target price of $ 365, which implies a 22% hike. Analyst John Sourbeer believes the medical products and services company (DHR) is “very well positioned” in the life science tools and services industry as COVID tests are expected to hold up much better than their peers and the opportunities vaccines and therapies appear to be durable.
âThe DHR sales engine is able to proactively identify areas of potential price pressure and [successfully] direct customers to a high-value product, âSourbeer wrote.
EOG Resources Inc. EOG,
has a stock price target of $ 119 which suggests a 38% increase. Analyst Lloyd Byrne, the oil and gas exploration company is well positioned to ease inflationary pressures expected next year given well costs which are expected to remain stable or decline in 2022 due to reduced days of drilling, the deployment of “super slide fractures” and contracts traded at lower rates.
âThe pricing power in commodity companies is elusive. Those who can maintain margins with the best possible cost control are, however, in a better position, âByrne wrote. “EOG is better positioned than most in being proactive with entry and service costs, while excelling in operations.”
EXR from Extra Space Storage Inc.,
the stock price target of $ 210 implies a 24% increase. Analyst Michael Goldsmith said he believed strong underlying demand, coupled with decelerating supply growth, was supporting rental growth.
âThe high demand for self-storage and high occupancy rates, combined with its non-discretionary nature, have increased the pricing power of operators,â Goldsmith wrote. âOperators adjust their pricing power to new customers, as well as rent increases from existing customers every 9 to 12 months. “
Generac Holdings Inc. GNRC,
has a target price of $ 500, which implies a 23% hike. Analyst Jon Windham believes the power generation equipment maker’s competitive advantage lies in its customer acquisition platform, which should enable it to gain market share from incumbent SolarEdge Technologies Inc. SEDG,
and Enphase Energy Inc. ENPH,
âThe dominant market share (~ 80%) and strong demand for home backup power isolated already high margins on residential products,â Windham wrote.
NKE from Nike Inc.,
the price target of $ 185 implies a 24% increase. Analyst Jay Sole said a UBS survey and pricing data shows the Nike brand is currently No.1 in the world and the sportswear and accessories company has a margin important maneuver to reduce promotions.
âWe believe the market does not fully appreciate how Nike’s investments in product innovation, supply chain and e-commerce work together to drive unit growth and [average selling price] increases, âSole wrote.
CRM Salesforce.com Inc.,
has a stock price target of $ 330, which implies upside potential of 20%. 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 increasing operating margins. annuals.
âIt is important to note that the factors behind the improved margin outlook seem to us to be sustainable, with an outperformance in turnover, a permanent shift towards WFH [work from home] and Zoom-based customer interactions, and a renewed spending discipline internallyâ¦ the top three drivers, âKeirstead wrote.
Teleflex Inc.’s price target of $ 480 implies a 28% hike. Analyst Matthew Taylor said the medical technology products company makes a number of inexpensive products that go unnoticed, giving them the opportunity to raise prices.
Taylor said he believes margins could increase “dramatically” in the long run, given the company’s influence over necessary and elective procedures, which are expected to return quickly in a post-pandemic world.