Overall profit margins for the S & P 500 hit an all-time high in 2021. But this is old news, and the current environment is more challenging. One of the differences of the company in 2022 isIf anyone can keep profit margins unchanged or grow in the face of rising inflation and slowing economic growth, then their stocks should outperform the market.

Companies can get pricing power in several different ways. Companies can sell goods or services that are vital to their customers or have a limited supply, leaving them no choice but to pay-economically, such products have low price elasticity. Examples include gasoline at the only gas station for miles, toilet paper at the grocery store, or accounting services for the tax season.

The fewer direct competitors a company has, the stronger its pricing power will be.A strong brand can also bring greater pricing power if customers have special affinity or loyalty. Consider that the unit price of Procter & Gamble Co's Tide detergent is usually higher than that of other similar brands.

Companies can also innovate and improve their products and raise prices when they launch upgraded products. If the price rises more than the cost of improvement, it is pricing power.This is common in software, drugs and medical devices, semiconductors and other high-tech products and services.

Last,Companies can expand profit margins by improving efficiency and productivity, or by taking advantage of economies of scale.This reduces the cost of sales per unit of product and increases profits without raising the price.

Eric Scherenstein, chief investment officer of Jensen Investment Management, says companies with pricing power are particularly attractive in the current environment.

Inflation is at a 40-year high, affecting the input costs of companies, and investors will want to buy companies that can pass on inflation. The new inflation comes at a time when economic expansion is slowing, which means that GDP growth will slow in the future. Stocks of companies that can maintain and improve profit margins in 2022 should be popular.

"the company is under too much cost pressure right now," Schnstein said. His investment management company, based in Oregon, manages about $14.5 billion in assets. "We are trying to find companies that can withstand these difficult environments. Companies that have been tested and come out of trouble should be able to cope again. "

Barron Weekly screened S & P 500 companies whose gross margins rose between 2020 and 2021 as the economy recovered, at least in the three years before the COVID-19 epidemic.

These companies that are best able to demonstrate pricing power at an annual inflation rate of 2 per cent should also be better able to demonstrate pricing power when inflation is above 7 per cent. These companies were also able to guarantee free cash flow between 2020 and 2021, suggesting that they were resilient during an economic downturn.

We screened out 27 companies that can be used as a starting point for further analysis. Here's a list:

A company with pricing power

Include$Microsoft Corp (MSFT.US) $、$NVIDIA Corp (NVDA.US) $和$Broadcom Ltd (AVGO.US) $Several major technology companies are on the list.Health care companies such as$Merck & Co Inc (MRK.US) $、$Zoetis Inc (ZTS.US) $和$Mettler-Toledo (MTD.US) $The same is true of waiting.

Their products and services are often different from their competitors and rely on constant innovation and updating. Customer demand or desire for the latest software, semiconductors, treatments or medical devices gives these companies pricing power and the ability to maintain profit margins in the face of inflation or slowing economic growth.

$McDonald's Corp (MCD.US) $And owningKFC, Taco BellYum Restaurant (YUM.US) $The impact of inflation on them is reflected in the cost of labor, packaging, beef and other inputs. Fast food chains are raising prices market by market to offset the rising prices. McDonald's Corp's overall price in the US rose by about 6 per cent in 2021.

Kevin Kevin Ozan, chief financial officer of McDonald's Corp, said at a conference in March: "We are seeing rising labour and commodity prices, our prices are set by our franchisees, and we usually raise prices less and more frequently, rather than with low frequency and big increases." We will also adjust the price according to the demand of the local market. "

The gross margins of several S & P 500 companies have been growing, including$Rockwell Automation (ROK.US) $、$General Electric Co (GE.US) $和$Lockheed Martin Corp (LMT.US) $。The costs of their transportation, labor, energy, semiconductors and many raw materials such as metals, resins and industrial gases are all rising.

The screened companies are using a variety of strategies to keep their profit margins unchanged.

Rockwell, which makes plant equipment, is raising prices as input costs rise. Nick Gunstad, Nick Gangestad, said at a conference in March: "We will adopt a price increase strategy to offset the impact of rising costs. We have announced price increases many times in the past six months. "

Cintas, which provides uniform rental, cleaning and other office and facility services for companies, says it is working to reduce costs through automation.

Todd Schneider, chief executive of Cintas, said on the company's earnings call last month: "pricing is part of our strategy, but it is by no means the only strategy to fight inflation. We are taking other measures, almost all of which are related to technology. "

"some companies are raising product prices to offset some of the rising costs, while using other means to maintain or improve profit margins," Carolina Debeck Harper, General Electric Co's chief financial officer, said on the company's investor day in March. Of course, one of the best ways to grow is innovation. All in all, the company-wide work we do to increase production and productivity far offsets the disadvantages you see from a mix of factors, inflation and growth investment. "