Inflation is showing up in earnings reports. For these stocks, it could be good news

Published Fri, Apr 23 202110:00 AM EDTUpdated Fri, Apr 23 202110:13 AM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Investors searching for signs of inflation this earnings season may be pleased to hear that a few names are emerging as the beneficiaries of rising prices. For companies with pricing power, a little inflation is a good thing. That's not the case for those that aren't able to raise prices quickly enough. This earnings season has offered a chance to hear what kind of pressures companies are experiencing. "They have talked about rising costs...and how they expect to raise pricing to pass through that cost," said Ohsung Kwon, U.S. equity strategist at Bank of America. Kwon said the percolating inflation in costs is not a surprise, and it parallels the warning that was in macro producer price inflation data. In the 12 months through March, the producer price index rose 4.2% , the biggest year-on-year increase since September 2011. Kwon said it is showing up in the earnings reports of industrials, materials and consumer staples companies so far. Positive developments for some For some industries, higher costs can be turned into a positive that can help margins expand. Credit Suisse strategists say so far this quarter, S & P 500 companies reporting earnings have seen margins come in 23% above expectations. So far, since many financial companies have reported, those gains have been lifted by the big margin gains in that sector, which were 100% above expectations. "We are absolutely seeing companies cite higher prices as a headwind for profits, but when we look through the actual results companies are reporting, we are not seeing that being detrimental this quarter, relative to what analysts were expecting," said Patrick Palfrey, senior equity strategist and co-head of quantitative research at Credit Suisse. "I do think in inflationary pressures, we are cycling through a difficult comparison," he said. "But as we move over the course of the next year, inflation should ease relative to comparisons." Executives at PPG Industries, for example, talked about cost pressures during their earnings conference call. They said they had anticipated higher costs and were already raising prices. But they also see the rise in some costs as peaking. "Our view of raw materials as they are, we hope, at the high watermark at this point, that will carry somewhat into Q3. We are seeing in some spot outages that we expect will continue through part of April and into May," said PPG chief financial officer Vince Morales. "We expect these raw materials to have normal seasonal patterns," he added. "And our pricing in different businesses by segment will differ. But certainly, in the second half and its entirety, we'll definitely offset raw materials is our expectation." Procter & Gamble also said it was experiencing higher prices. Commodity costs will be up $125 million this year, a number that was expected to be flat. Freight is also higher at $200 million, up from its previous full year outlook of $100 million. The consumer goods company said it will raise prices in September to combat higher costs. The increases in baby products, feminine hygiene and others will vary by brand and are expected in the mid- to high- single digits range. But Citigroup analysts downgraded its stock to neutral , saying that rising commodities will hurt the company's margins in the interim and it could face "incremental pressure" and results could be "bumpy" in the next several quarters. Winners emerge amid rising prices Bank of America's Kwon said another sector that could be vulnerable to inflationary costs is consumer discretionary, including stores and restaurants. Those industries are reopening and restocking, and will need workers. It is yet to be seen, but Kwon said the surge in demand for workers could contribute to rising labor costs. He does not expect to see evidence of labor inflation right away, though it may show up later in the year. Bank of America strategists created a list of companies that should do well in the recovery and benefit from reflation. The companies on their list were rated as "buy" by the bank's research team and were also considered for their valuation. These stocks "appear poised to benefit from both the recovery (exposed to re-opening/services spending or capex) and reflation themes (inflation beneficiary with pricing power or margin drivers). " The list includes The Walt Disney Co. , which the analysts say should benefit from pent-up demand for its theme parks. The entertainment giant has already been able to raise the price of its streaming Disney+, even though the service is less than two years old. Principal Financial Group was another name that could benefit, as life insurers have a positive correlation to inflation. "The liability side of the balance sheet tends to be fixed while the asset side is able to compound to those liabilities more quickly. Within PFG, its retail life book is most levered to this theme," Bank of America noted. Another pick is Marriott International , which can charge higher room rates as demand increases. Axalta Coating Systems , a coatings producer, is in an industry that has pricing power and a fragmented customer base. Railroad Union Pacific is another inflation beneficiary, since it can raise prices as shipping by rail is cheaper than truck transportation. The industry also has easy comparables to last year, when volumes fell more than 20%. Union Pacific earnings and revenues missed estimates, due to weather related challenges, but it reaffirmed its outlook on improving economic conditions. The stock fell post-earnings, but was higher Friday. Broadcom also made the list because it has some of the best pricing power in the tech industry, the analysts note. They say it should benefit from the reopening of enterprise spending and 5G.

A container is lifted off of a cargo ship at the Port of Oakland in Oakland, California, on Tuesday, March 23, 2021.

David Paul Morris | Bloomberg | Getty Images

Investors searching for signs of inflation this earnings season may be pleased to hear that a few names are emerging as the beneficiaries of rising prices.

For companies with pricing power, a little inflation is a good thing. That's not the case for those that aren't able to raise prices quickly enough. This earnings season has offered a chance to hear what kind of pressures companies are experiencing.

"They have talked about rising costs...and how they expect to raise pricing to pass through that cost," said Ohsung Kwon, U.S. equity strategist at Bank of America.