Companies with Pricing Power

[DooDiligence]

Bump

[Guest notorious546]

I want to start a thread of companies which have emerging or temporarily depressed pricing power.  Concerning the definition of pricing power, Buffett's example of not having to hold a prayer meeting before asking your customers for a price increase will do.  Please exclude cyclical pricing power (i.e. a farmer who today gets more for his corn). 

 

My best example is Federal Express and United Parcel Service.  DHL has exited the US domestic parcel business.  The United States Post Office is loosing money and will be forced to raise prices at some point soon.  A duopoly is emerging in US domestic freight and Federal Express and UPS both say the right things in terms of "yield management" being "the number one priority" and returns on capital needing to improve. 

 

I agree that these companies have been able to increase pricing at rates above inflation for the past 10+ years. One thing i have found is that the shares haven't really increased all that much in this cycle if i remember correctly. The data i remember was that they delivered good returns but still lagged the S&P500. So perhaps these businesses aren't appreciated yet (multipled could be higher) or they haven't yet been able to generate attractive operating leverage resulting in strong FCF/margin growth.

 

 

 

A thoughtful response will be greatly appreciated.  I look forward to the discussion!

[DooDiligence]

"It is hard to come up with companies that have pricing power today because so much of the opportunity, and venture capital money, is in finding a way to get a product directly from the producer to the consumer. This is much more efficient than the value chains of today, where you have a producer selling to a distributor, then to a retailer and then to the consumer. It is hard to see anyone in that chain having pricing power when the competition lies in the producer trying to get directly to the consumer. Look at the example of Gillette. Five years ago, you could say that it was as entrenched as a consumer brand could get. Media marketing to the consumer directly has turned that industry upside down."

 

"The pricing power is probably with those companies that are earning almost no money because they are massively growing scale to become the dominant player and only then worry about monetising. YouTube is monetising numbers by charging like 4 cents per hour watched, whereas typical cable is charging 20 cents. It has pricing power, but it’s not a separate company selling at a low P/E and having pricing power. It is a company that is reinvesting heavily to dominate its business. Amazon is probably one company that has pricing power. Today, pricing power is in a different place than it was 20 years ago. Back then, you would have said that the cable networks or consumer brands had pricing power."

 

-

 

Excerpt from https://www.outlookbusiness.com/specials/masterspeak_2017/companies-that-maximise-per-share-value-even-if-they-dont-grow-will-be-great-bets-3783 previously posted on another thread by Liberty.

[Sharad]

biaggio - I was thinking that too, but they do lose customers with the higher prices. 

 

Maybe a niche - cigars? 

 

Spirits and Wine? 

 

Still think you are looking at "luxury", high end goods.  Like caviar and Flyers tickets (which only a true epicurean can appreciate)

 

I think a business with pure pricing power isn't concerned about losing customers, and is looking to maximize profits, and by that definition, NFLX, AAPL and GOOGL should be considered companies with strong pricing power, as should tobacco companies (losing 75% of your market to smokers quitting and still achieving higher EPS are good characteristics of a company with pricing power). I think elevator companies have pricing power (on maintenance of the elevators themselves), enzyme companies (small input cost in the production of yogurt, cheese, wines, beers and other fermented products), and some drug companies have pricing power (I'm invested in NVO on that very thesis). A good sign of a company with pricing power is one that has a high ROA (ROE can more easily be manipulated through financial engineering) and it remains so over the years. I think a decade of high ROA means a good chance of pricing power.

[ourkid8]

Class I Rails, they are all able to raise prices above inflation along with passing fuel surcharge costs back to the consumer.  My fav is CN Rail ...

[BG2008]

FRPH owns an aggregate royalty business - They don't mine, they just collect royalty and has a 63 year life at 6.5mm tons of depletion a year. 

 

From 2006 to 2016, aggregate volume dropped from 10.3mm tons to 5.5mm tons, yet revenue increased from $5.3 to $6.1mm.  Avg royalty per ton increased from $0.52 to $1.07.  See attached slide.  They even increased unit price in 2009!!  The cement business was able to hold steady on the royalty, but couldn't increase price.  I wish every company that I owned had pricing power like this.  The best part is that in 50 years, Amazon, Google, and Facebook, won't do anything to change this dynamic. 

Aggregate_Unit_Volume_and_Unit_Price_Sep_2017.pdf