Pricing Power Play

Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The most defensive companies in the world can raise prices without losing customers. This pricing power gives these companies an edge over their competitors during times of rising commodity prices. Pricing power is the key to financial strength and longevity in the marketplace.

Companies like The Hershey Company (NYSE: HSY) and J.M. Smucker (NYSE: SJM) can raise prices if input costs go up, but don’t risk losing much market share because of strong customer loyalty.

These stocks tend to do well even during recessions because consumers believe they can’t live without Hershey’s candy or Smucker’s peanut butter and jelly. Dividends from these two consumer staples companies yield 2.1 percent and 2.3 percent, respectively.  They also carry low betas, meaning low stock price volatility, providing stability to the investor who hates wild swings in their investments.

Hershey raised prices 2.3 percent in the fourth-quarter, which contributed to its 11.7 percent increase in its fourth quarter net sales of $1.75 billion. Hershey’s sales gain also came from 7 percent higher volume, 2 percent contribution from Brookside acquisition and a 0.7 percent foreign currency benefit. Earnings rose 6.4 percent in the quarter to $0.66 per share. With strong pricing power and momentum for 2013, management raised its 2013 earnings growth to 10-12 percent from 8-10 percent.

Hershey will benefit from the price of cocoa falling 8 percent from a year ago and down 19 percent from its peak in September. Hershey’s margin is likely to expand resulting in higher earnings in 2013. Argus Research recently raised its target price by $10 to $92 per share. Its beta is 0.59, which is way below the market of 1.00.

Hershey candy bars are still cheap, selling for around $1.50. I believe Hershey could raise prices another 25 percent and still sell plenty of chocolate bars and Reese’s Peanut Butter Cups.

Smucker had raised prices on many of its products in 2011-12 because of inflation in commodities, but coffee prices fell substantially in 2012. Arabica coffee fell 32 percent in past 12 months. Smucker recently announced plans to cut coffee prices 6 percent due to declines in green coffee bean costs. Smucker decreased the list price for the majority of its packaged coffee products sold in the United States, primarily consisting of items sold under the Folgers and Dunkin' Donuts brand names.

Smucker reported Feb. 15 that fiscal third-quarter earnings rose 32 percent to $154.2 million, or $1.42 per share, from $116.8 million, or $1.03 per share, a year earlier.  Quarterly net sales rose to $1.56 billion from $1.47 billion a year earlier.  Smucker expects net sales to rise more than 6 percent in fiscal year 2013.

Standard & Poor’s recently gave Smucker a “strong buy” rating with a 12-month target price of $105.00. Smucker’s Beta is 0.62 -- again well below the general market.

A well-diversified stock protfolio should include some defensive companies with pricing power. These companies offer a measure of safety if there is a downturn in the economy, but still perform well in good times too.



Michael R. Hooper owns shares of The Hershey Co. and The J.M. Smucker Co. He is a freelance writer based in Topeka, Kan. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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