Inflation is coming—and
might be one of the better ways to play it.
It doesn’t take a genius to spot rising prices. It’s there in the surging prices of commodities like steel, copper, and corn. It was there in Friday’s personal-consumption data, which saw prices rise 0.5% in March from February. And it has been a focus of corporate conference calls, where companies like
(ticker: PG) and
(CAT) talk about higher costs and how they plan to pass them on to consumers.
The biggest question now is whether inflation will be transitory, as the Fed insists, or something more sustained. For evidence, Warren Pies, founder of 3Fourteen Research, is looking at the level of inflation priced into two- and 10-year Treasury inflation-protected securities, or TIPS.
Starting in November, break-evens for two-year TIPS—the amount of expected inflation reflected in the security—began rising faster than those for the 10-year, a sign that investors were willing to price inflation in for the short term but not the long term. Now, the ratio between the two stands at 1.14, relatively unchanged over the past two months, with the two-year break-even at 2.76% and the 10-year at 2.42%. If the ratio starts falling, it could be a sign that inflation is becoming more structural.
Either way, prices are going higher—and Sherwin-Williams (SHW) should benefit. The paint manufacturer’s stock was little changed this past week after reporting a profit of $2.06 a share, well above forecasts for $1.64, on sales of $4.66 billion, topping expectations for $4.51 billion. But it was its comments on pricing that really caught investors’ attention.
“Our previously announced 3% to 4% price increase to U.S. and Canadian customers became effective Feb. 1, before the supply-chain disruption the industry began experiencing later in the quarter,” Sherwin-Williams CEO John George Morikis said on the company’s conference call this past Tuesday. “We likely will need to take further pricing actions if raw material costs remain at these elevated levels.”
Baird analyst Ghansham Panjabi, who rates Sherwin-Williams a Buy, notes that it is likely waiting to see just how much its costs rise so it doesn’t have to raise prices more than once more this year. If the company can raise prices without hurting sales, it can keep growing its profit margin even as input prices rise. Panjabi raised his price target on the stock to $300, up about 10% from Friday’s close of $273.87, calling it “the ultimate hedge toward inflation.”
And that’s not a bad thing to have right now.
Write to Ben Levisohn at Ben.Levisohn@barrons.com