A rising tide lifts all boats, but in times of lacklustre growth, only some companies can keep their earnings rising regardless.
Such companies – which include the big banks, online classifieds companies, building materials makers and heavily regulated industries that can nonetheless count on being allowed to pass on above-CPI price rises to customers every year – are singled out in a Macquarie analysis as “price makers”, able to boost their own profits with relatively little concern for competitive pressures or decreased customer demand putting a damper on things.
The building materials sector – specifically the two majors Adelaide Brighton and Boral – are “well positioned to benefit from the continued tightening in the housing market”. Photo: Paul Harris
Despite a rapidly improving global economy, Australian companies have in recent months had to grapple with domestic demand, a situation that a team of Macquarie analysts led by Jason Todd do not expect to change.
“Weak aggregate demand has been a significant constraint for corporate pricing power and ultimately earnings growth since the end of the GFC. We don’t see conditions changing in the coming 12-18 months,” they wrote.
“However, we see considerable scope for selected stocks and industries to leverage off supply side constraints and/or underinvestment, structural demand and policy supportive pricing structures which at a minimum allow CPI pass-through.”
Macquarie’s analysts liked the big four banks, because their ability to “reprice” or raise interest rates on their mortgage back-book allows them to keep boosting profits. There’s plenty of scope for banks to “manage their margins”.
Meanwhile, the building materials sector – specifically the two majors Adelaide Brighton and Boral – are “well positioned to benefit from the continued tightening in the housing market”.
Historically, the analysts noted, these two companies have battled fiercely over market share, meaning they’ve been poor at extracting higher prices from the market. “But there is now evidence emerging (in publicly announced product price rises) that they are becoming more price disciplined as utilisation picks up”.
Online classifieds businesses are another area able to set their own price. That’s because the major classifieds businesses tend to be the dominant players for a particular type of product.
REA was a favourite because it had a “consistent record of being a strong price maker”. Other online classifieds companies singled out by Macquarie were Carsales.com.au and SEEK.
The last sector touched on by Macquarie was one that, technically speaking, doesn’t have any pricing power at all. Health insurance companies, utilities providers and toll road operators generally have to have any price rises approved by governments, but the prices negotiated at a minimum cover inflation and “provide companies with the certainty of not having to deal with real price deflation”.
Price deflation isn’t an idle concern, the analysis states. Supermarkets, consumer electronics and telecommunications companies are all suffering varying levels of outright price deflation, due to structural and competitive pressures. Until domestic consumer demand improves, the Macquarie analysts don’t see this changing.