Caterpillar has raised prices. Its strategy isn’t hurting earnings.
David Paul Morris/Bloomberg
Inflation is hot—and a lot of stocks are feeling the heat. But a few aren’t, and those are the ones to scoop up now.
Why these stocks don’t get blistered, and others do, boils down essentially to the concept of pricing.
Price increases are higher than they have been in 40 years. The latest consumer-price index, out Thursday, rose at an annual rate of 7.5%, higher than the 7.2% that economists had forecast and far above the 2%-to-4% range of the past several years.
Not long after the government posted January’s number, the Dow industrials fell 1.2%, and the S&P 500 and the Nasdaq both dropped 1.4%.
Wall Street just can’t shake that nagging feeling that the Federal Reserve will lift interest rates more than four times this year, which is what the markets have been counting on the past few weeks. Five or six or however many more rate hikes would almost certainly choke off the economy. And sluggish economic growth more often than not translates to more sluggish earnings growth.
Until inflation cools, though, there are companies that can beat back the inflation flames. The reason: strong pricing. They, in part, are driving inflation because they can raise prices without destroying too much demand for their products.
These companies fall mostly in the manufacturing and consumer sectors. They’re often market leaders or brand names.
Here are four stocks that are defying inflation’s downward pull on the market:
- Caterpillar (ticker: CAT) had an earnings blowout in its last quarter, showing inflation isn’t throwing water on customer demand. In its latest financial report, the heavy machinery company reported a profit of $2.69 a share, beating estimates of $2.27 a share, on sales of $13.8 billion, above expectations for $12.6 billion. The EPS number beat expectations by 17%, an impressive feat considering that aggregate S&P 500 EPS has beaten estimates by just under 6% for the fourth quarter, according to Credit Suisse data. High prices drove the numbers. On the company earnings call, management told analysts that pricing “picked up” in the third and fourth quarter of 2021. The stock is down 1.5% year to date; the S&P 500 is off 5.1%.
- CNH Industrial (CNHI), which makes farm equipment, trounced profit estimates, too—by 19%. For the last quarter, the company reported a profit of 25 cents a share, beating estimates of 21 cents a share, on sales of $9 billion, above expectations for $8 billion. Again, on its earnings call, the company attributed the blowout to higher prices, especially in its North America business. Shares have dropped this year, but just 0.7%.
- Procter & Gamble (PG) beat earnings estimates. The company posted a profit of $1.66 a share, beating estimates of $1.65 a share, on sales of $21 billion, above expectations for $20.3 billion. The company said that not only did higher prices help drive the results, but that it will lift prices across more product categories throughout this year, which will help drive earnings growth. The stock is down 3.5% for the year.
- Philip Morris (PM) scored its earnings beat on Thursday. The cigarette maker had a profit of $1.35 a share, outrunning estimates of $1.33 a share, on sales of $8.1 billion, above expectations of $7.8 billion. The company said it raised prices on its traditional combustible products and its smokeless IQOS products, and management expects to keep increasing prices throughout the year. Year to date, shares have gained 9%.
The takeaway: Companies that drive inflation can usually hold their own against inflation. Look for those companies that can flex their pricing power.
Write to Jacob Sonenshine at [email protected]
