2 stocks that could prosper with rising inflation
The companies that can thrive in times of inflation are usually the ones that can demonstrate their pricing power. This way, when input costs increase, they can increase the prices of their products without losing customers. In this segment of “The Five” recorded December 14th, Fool contributors Trevor Jennevine and Connor Allen discuss inflation and highlight a few stocks that may benefit from it.
Trevor Jennevine: Building on that, the first part of the question with the consumer price index so high and the producer price index also increasing quite quickly. Let’s each talk about a business that we believe could benefit the environment. Connor, we’re going with you.
Connor Allen: I’m going to choose two and these are the ones I mentioned in the last question and these are Garmin (NYSE: GRMN)and Apple (NASDAQ: AAPL) . Everyone knows Apple, a very strong free cash flow, a really strong return on invested capital, but Garmin is another one that I really like. Garmin has a fairly solid market share in several different industries. These include navy, these include clothing, aviation, and the outdoors. Across all of these specific industries, Garmin offers some of the highest prices compared to its competition when it comes to the Garmin clothing and watches they have available. These are all very high prices when you talk about marine and all the electronics they have for fishing, very expensive compared to the competition and especially when you talk about aviation. Aviation, they actually have a lot of long contracts with big business and the government in terms of jets and other farm planes and stuff like that.
They are in fact almost double the price and the aviation electronics that pilots need almost double the price of a lot of their competition, but people keep buying Garmin and that’s for various reasons including understood the fact that the equipment they use is certified and some of their competitors are not, which allows you to use them when you face turbulence and other issues that pilots typically face. Garmin also has pretty strong margins.
They’ve had EBITDA margins of 25-30 percent over the past five years that balance out a bit. They actually loaded up their inventory in the US in order to tackle the supply chain issues that are causing inflation, so I guess they’ve tackled that a bit and that they are currently building up their stocks. It’s Apple. I don’t think I need to explain much more than just saying their name, but they just keep raising investor expectations over the past quarter. They had very high expectations and they beat them. It’s something that they keep doing over and over again, no matter how much those expectations might turn out to be something I love about the business. This year they are making over $ 1 billion in revenue per day which is just crazy. It’s crazy to even think of that number and they’ve been over the last five years, they’ve had EBITDA margins of 25-35%.
I would like to talk about high margins, especially in a time like this when costs are rising.
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