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 . /zigman2/quotes/203047719/composite FDX +3.30% , Nu Skin Enterprises Inc . /zigman2/quotes/200206291/composite NUS +2.62% and Dollar Tree Inc . /zigman2/quotes/203712248/composite DLTR +1.68%
Third-quarter earnings season kicks off in earnest next week, with aggregate earnings per share of the S&P 500 companies /zigman2/quotes/210599714/realtime SPX +1.42% expected to show year-over-year growth in earnings per share of about 27% and in sales of about 15%.
“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:
Advance Auto Parts Inc. /zigman2/quotes/202065737/composite AAP +4.83% , 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.”
Apple Inc. /zigman2/quotes/202934861/composite AAPL -0.61% , 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. /zigman2/quotes/210449693/composite CME +2.97% , 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.
Danaher Corp. /zigman2/quotes/210555154/composite DHR -1.14% 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.