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The interplay between cost inflation and price increases will likely be a key focus of the upcoming earnings season.
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Investment brokerage firm Forsyth Barr expects the overall aggregate earnings to be almost flat, as a number of pockets of the economy are struggling, including tourism and travel.
However, companies able to pass on rising prices to customers were expected to outperform the rest.
“So it’s been quite an unusual environment recently we’ve seen some significant price increases and cost inflation on both labour and materials and energy for that matter,” Forsyth Barr senior analyst Aaron Ibbotson said.
“Some companies are likely to benefit quite strongly from this – companies with strong pricing power and ability to pass it on – and others will suffer in particular companies with labour shortages … and labour costs.”
Milford Asset Management portfolio manager Sam Trethewey said companies with strong brands will be better placed than others to pass on costs, but labour shortages were weighing on most.
“A lot of companies we have spoken to lately have been very clear that there are staff shortages out there, that recruitment is tough, and that is flowing through to wage pressure for the businesses,” Trethewey said.
“Whether it is stifling economic growth or not will be the big question, and the companies that have strong business models, have pricing power, have competitive advantage, maybe a strong brand or a sought after product, that can pass on that cost and maintain profit margins, will be the ones that are sought after and rewarded by investors.”
Ibbotson said a number of companies were thriving in the high inflationary environment, including Mainfreight and Steel & Tube, as well as Fletcher Building.
However, Forsyth Barr’s report notes it would be a different story for companies on the receiving end of those cost pressures, such as SkyCity, Genesis and Auckland Airport.
The report says Contact Energy had a standout year, which was expected to be reflected in its result, with potential to pay a higher dividend, while the other retailers were likely to have less scope for a larger payout.
Forsyth Barr also had a positive outlook on the medical and pet supplies distributor EBOS Group as well as SkyCity.
“Having been under pressure over the last two months due to Australia’s lockdowns and regulatory scrutiny of peer Crown Resorts, SkyCity’s stock looks attractively priced.”
