Abnormal profits: Why they're coming and where to find them

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A bunch of global companies should get a handy bump from the trade-off between commodity prices and their own price increases, says Ellerston Capital's head of small and mid-caps Bill Pridham.

“If costs stay flat relative to where they are today, you’re going to get some abnormal profits coming through next year, on the margin side of things,” he said in a recent Livewire interview.
As Pridham explains, companies who have already lifted prices will get the full 12 months’ annualised benefit of those increases. As an example, he points to bedding manufacturer Tempur Sealy – currently one of his portfolio’s largest position. Management has indicated around half of their recent price increases will flow through into next year.

“And if commodity costs stay where they are, even at these elevated levels, they’ll get margin growth on top of that,” Pridham says.

“But imagine if those commodity costs come down. The bedding industry doesn’t give those back.”

Rather than obsessing over the “transitory versus structural” debate, this is where the rubber hits the road for global small caps vis-à-vis inflation.

In the following interview, Pridham explains how to spot companies likely to benefit from this inflation-linked margin uplift – an underappreciated upside from COVID-linked supply chain snarls.
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