Hedge Inflation With Pricing Power: The Walt Disney Company (DIS), PepsiCo, Inc. (PEP) and More

Page 1 of 2

With interest rates at historic lows and a federal government that cannot afford to have its interest payments rise, the Federal Reserve’s unprecedented Quantitative Easing program has no end in sight. Cheap money inevitably leads to inflation. So, whether it is apparent in current economic statistics or not, above-average rates of inflation are undoubtedly in our future.

Inflation has a disproportionate impact on the poor and elderly. The poor spend most of their income on essentials like food and gasoline, which are extremely sensitive to inflation. Meanwhile, the elderly usually own bonds and other “safe” assets that destroy purchasing power during periods of high inflation.

The Walt Disney Company (NYSE:DIS)But the poor and the elderly are not the only ones in trouble when high inflation creeps its way into the economy. For many companies, an increase in the price of raw materials and other inputs will crush margins and lower profits. So even people with a high allocation to equities will feel the pain of high inflation.

That is, except for investors who own businesses that have pricing power. Pricing power is the key to outrunning inflation. Companies with pricing power can pass on higher input costs to their customers that keeps profits growing at least as fast as inflation. These are the stocks you want to own in all economic environments — but especially during periods of high inflation.

A Few Companies with Pricing Power

Philip Morris International Inc. (NYSE:PM) is an example of a company with pricing power. Philip Morris has nearly a 1/3 share of the markets in which it competes most heavily. This is due to the company’s strong tobacco brands, the most famous of which is Marlboro. The addictiveness of its tobacco products lends itself to customer stickiness, but the excise taxes placed on sales of cigarettes also benefits the company. The price of all cigarette brands are already high because of the taxes, and customers have shown that they are willing to pay a few bucks more for their favorite brand.

Philip Morris also owns a number of well-known food brands. Its portfolio includes Jell-O, Cool Whip, Cream of Wheat, Honey Bunches of Oats, Chips Ahoy, Snackwells, Toblerone, and countless other brands that have cheaper knock-offs — but customers are still willing to pay more for the real brand. The aversion to off-brand products is especially strong in American consumer culture, which gives Philip Morris a high degree of pricing power.

The Walt Disney Company (NYSE:DIS) is another company that can keep margins up amid high inflation. The company owns valuable TV networks, like ESPN, that dominate their segments. Disney also owns theme parks, countless hit movie franchises (and associated merchandise), and a strong brand name that makes nearly everything it touches golden. A one-of-a-kind business like Disney can maintain margins by raising advertising rates (for its TV networks) and raising prices of valuable merchandise.

Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

The 10 Most Peaceful Countries in the World

5 Big Reasons Communism Failed

The 15 Most Famous Carl Icahn Quotes

10 Scary Animals that are Actually Harmless

The 8 Most Famous Singer-Actors in Entertainment

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!