Morgan Stanley has identified high-potential stocks across key sectors that exhibit strong pricing power amid declining inflation.
These companies should maintain or increase their prices, leading to improved profitability and market performance.
They have favorable market dynamics, competitive advantages, and market-leading positions that support their pricing power and potential for long-term growth, Morgan Stanley said.
Here are the stocks by sector and what Morgan Stanley’s analysts say about them:
Communication Services (XLC)
- Spotify (NYSE:SPOT): The company has maintained its product prices globally and across all tiers for over a decade, despite increasing its library of music and audio content.
- Disney (DIS): Disney’s unique IP and brands support its long-term growth across its Parks and Media businesses, and its scaled investments generate a strong ROIC. However, its content assets are under-earning and undervalued as it transitions to media monetization.
Consumer Discretionary (XLY)
- Ferrari (NYSE:RACE): Ferrari has built a strong brand on engineering, Formula 1 DNA and exclusivity. Their pricing power is based on strict supply control and a 2-year backlog, giving them the industry’s strongest pricing power.
- Chewy (CHWY): The company has a strong history of pricing power due to its ~70% revenue from pet consumables, which has never seen a deflationary price environment.
- Lululemon (LULU): The company stands out among its peers as one of the few Softlines Retailers & Brands that follows a full-price selling model, avoiding promotions and markdowns to drive sales. This consistent approach has allowed LULU to maintain strong pricing integrity and continuously raise ticket prices over time.
- On Holding (ONON): It has successfully raised prices on 80% of its products by 10% or more in the past 1.5 years without facing consumer resistance. With premium partnerships, strategic exits, and effective sell-out management, ONON is poised to maintain long-lasting pricing power.
- Darden Restaurants (DRI): The company has several high-end/steak brands, while Olive Garden has been more restrained on pricing/good value perception, giving them latent pricing power.
- Chipotle Mexican Grill (CMG): It has implemented an aggressive pricing strategy, but it has not negatively affected customer perception. Despite this, CMG plans to avoid further price increases this year while still maintaining favorable customer traffic.
Consumer Staples (XLP)
- Mondelez (NASDAQ:MDLZ): The company has the strongest pricing power due to their focus on snacking and indulgent categories. This has led to robust demand and positive volumes despite significant pricing increases (+16.2%) in Q1.
- Philip Morris (PM): The company has a strong pricing power in the tobacco industry, benefiting from its position as an international leader in combustible cigarettes. PM’s strong pricing growth is supported by a favorable excise tax environment.
Energy (XLE)
- Schlumberger (SLB): SLB’s strong market presence in concentrated markets (~30-35% of revenues) with high pricing power, along with its Digital & New Energies businesses are expected to drive long-term growth and pricing advantages through technology investments and strategic partnerships.
- Baker Hughes (BKR): BKR is positioned for pricing power across its portfolio due to its focus on international and offshore markets (70%-75% exposure), as well as favorable market structure and long-term growth opportunities in New Energy and Digital Solutions.
Financials (XLF)
- MSCI (MSCI): MSCI has an attractive business model with a scalable infrastructure, recurring revenue, and a strong brand name. The index industry benefits from network effects and high switching costs, making it difficult or costly for asset managers to switch benchmarks.
Healthcare (XLV)
- Becton Dickinson (BDX): The company’s strong pricing power in the MedTech industry due to its low unit costs, high market share, and a significant portion of sales coming from lower-priced products helps it to maintain pricing stability, navigate inflationary environments, and fend off low-cost competitors. Additionally, BDX’s non-cyclical nature makes it an appealing investment choice in volatile and uncertain markets.
- Vertex (VRTX): VRTX’s drugs, which are considered the standard of care for cystic fibrosis, enjoy exceptional pricing power due to the absence of competition from both generic and innovative companies.
Industrials (XLI)
- Transdigm (TDG): The company has the most resilient business model in the commercial aerospace industry, with 90% of its portfolio consisting of proprietary products and 75% of its products being sole sourced, allowing it to adjust pricing and sustain or improve margins in inflationary conditions.
- Howmet (HWM): It is a strong operator with upside from continued aerospace end market recovery and market share gains from VSMPO-AVISMA. Aerospace grade castings and forgings remain a bottleneck for new airplane production, providing Howmet with pricing power and market share wins from underperforming peers.
- Bloom Energy (BE): The combination of rising utility bills, an inability for utilities to meet the growing energy needs of customers, and its ability to drop its per-unit product cost has provided considerable pricing power.
- Deere & Co (DE): The company expects pricing to moderate off peak inflationary levels, but NA Ag Equipment is the most preferred end market. Analysts expect pricing to remain more resilient in a more challenging end market scenario.
- WillScott Mobile (WSC): The company has the strongest pricing power/narrative in Morgan Stanley’s coverage due to spot market strength and idiosyncratic levers. Even if spot pricing moderates, idiosyncratic levers should support double-digit pricing over the next 2-3 years due to long lease durations and evidence of VAPS penetration.
- Verisk (VRSK): With its vast historical database of P&C data, VRSK possesses unparalleled capabilities in risk pricing, policy creation, and offering valuable analytics, fostering strong relationships with clients, and delivering solutions that enhance their overall value.
- Canadian National Railway (CNR:CA) (CNI): It is strategically positioned to maintain strong pricing power within the rail industry due to its renewed emphasis on capacity discipline and its unique growth factors, including long haul capabilities, a protected grain market, a growing international intermodal franchise, and limited competition from trucks in the domestic intermodal market.
- Old Dominion Freight Line (ODFL): Recognized as a leading franchise in the freight transportation industry, ODFL benefits from positive market trends and industry consolidation. Its pricing discipline and resilience have enabled it to weather downturns and quickly recover from volume share loss, making it a “bellwether” and top performer in the less-than-truckload space.
Information Technology (XLK)
- NVIDIA (NVDA): The chip manufacturer is capitalizing on its pricing power with the introduction of new data center chipsets that command double the average selling price compared to previous generations. This has led to shortages reported by some customers, but spending on AI and NVDA chips has remained robust, positioning NVDA as the sole secular growth player in the compute semiconductor end-market this year.
- Model N (MODN): The company is recognized for its exceptional pricing power due to its 4X-5X return on investment, high switching costs, and heightened regulatory risks. MODN provides robust compliance management as a system of record, allowing customers to achieve 4X-5X return on investment, high switching costs, and increased regulatory risks.
Real Estate (XLRE)
- Welltower (WELL): It has record pricing power on renewal leases, sending increases up +11% Y/Y due to limited supply and strong demand from an aging population.
- Prologis (PLD): The company is experiencing favorable conditions due to limited supply and robust demand. Rent growth of 10% is expected this year, indicating a positive outlook for the company.
Utilities (XLU)
- Sunnova (NOVA), Sunrun (RUN), SunPower (SPWR): All three are competing against local utility providers in the residential rooftop solar installation industry. Despite challenges such as rising capital costs and inflationary pressures on hardware, the companies have been able to raise prices and maintain or increase their margins and customer base.
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