Goldman Sachs is eyeing gross margin to fend off inflation

Analysts Notebook wrote a column · Apr 15, 2022 02:35

A four-decade high in inflation and rising commodities prices are sabotaging businesses. Investors are bothered, eager for companies that can maintain decent profits regardless of increased costs for production.

$Goldman Sachs(GS.US)$ equity strategists stressed the importance of pricing power for companies when they grapple with inflation.

Pricing power will become increasingly important in the face of continued inflation and cost pressures. In order to assess the sustainability of margins, we will monitor the ability of firms to pass increased costs through to consumers."
---- David Kostin, chief U.S. equity strategist.

Look out for the gross margin

Goldman Sachs has sorted out the gross margin data of companies for investors. A higher gross margin renders one company sufficient pricing power, allowing it to pass the inflation cost to consumers.

Grouped by sectors, Info Tech, Healthcare, and Consumer Staples lead the pack with a minimum average 5-year gross margin of 63%.

Source: Goldman Sachs

This ranking based on gross margin date coincides with research conducted by $JPMorgan(JPM.US)$ weeks ago, which surveys investors for opinions about which segment will outperform over the next three months.

Source: JP Morgan

Except for the Energy sector, which benefits directly from cost-related inflation, Info Tech, and defensive sectors both enjoy great gross margins. It seems like investors have already shifted their focus to companies with solid pricing power.

Goldman Sachs glean financial data from individual companies. The chart below lists the top 7 companies in Healthcare and Info Tech sectors with the highest gross margin.

Source: Goldman Sachs

$Align Technology(ALGN.US)$ $Cooper Companies(COO.US)$ $Edwards Lifesciences(EW.US)$ $Johnson & Johnson(JNJ.US)$ $Mettler-Toledo International(MTD.US)$ $Waters(WAT.US)$ $Zoetis(ZTS.US)$ $Adobe(ADBE.US)$ $Cadence Design Systems(CDNS.US)$ $Dolby Laboratories(DLB.US)$ $Fortinet(FTNT.US)$ $Oracle(ORCL.US)$ $Synopsys(SNPS.US)$ $Workday(WDAY.US)$

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