These days, there's a lot of talk about inflation. The last time prices rose this much, the stock market was on the verge of a collapse. Even with five Federal Reserve presidents signaling that the loose monetary policy should end, Chairman Jay Powell continues to assume that rising prices are temporary. Maybe the best strategy is to buy stocks that can benefit if inflation does persist.
Paycom (PAYC -1.30%), PayPal (PYPL -0.72%), and Starbucks (SBUX -1.02%) can all weather the storm of rising prices. However, they'll do it in different ways. If current trends hold, we should get used to higher wages, interest rates, spending, and prices. That isn't all bad news for these companies. Here's why.
Image source: Getty Images.
1. Paycom
Paycom offers a cloud-based human capital management solution to help companies manage employees from recruitment to retirement. Much of that involves handling payroll for clients. What many don't realize is that the funds to pay employees are often deposited with service providers like Paycom well in advance. That cash can be invested over the short term. Because of that, interest rates can have a material impact on earnings.
Through the first six months of this year, the company has earned $155 million on short term investments made from those funds held for clients. In the full year 2020, it generated more than $300 million.
In closing 2020, management highlighted several factors that impeded growth of recurring revenue. One of them was the lower interest rates relative to 2019. If inflation is here to stay, and interest rates rise, Paycom will benefit in a way that is off the radar for many investors.
2. PayPal
PayPal is another company with a way to benefit from inflation that may not be obvious. It generates revenue from activity on its payment platform. The company reports its take rate -- revenue generated as a percent of total payment volume -- each quarter. And higher prices just means more money.
For example, assume two transactions made on the platform a year apart. The first is a $100 purchase. After inflation sets in, the same item costs $105 the following year.
| Purchase | Take Rate | PayPal Revenue |
|---|---|---|
| $100 | 2% | $2.00 |
| $105 | 2% | $2.10 |
Data source: author's calculations.
With inflation, the company generates more revenue without doing anything different. It would be a welcome change. That's because PayPal's take rate has been trending down over time. In the most recent quarter, the take rate on transactions was 1.86%. That was down from 2.23% in the same quarter last year and 2.25% in 2019.
In addition, management pointed to lower interest income on customer balances as a headwind in the latest quarter. If interest rates rise, that gives the company yet another way to flourish in an inflationary environment.
3. Starbucks
One way to survive inflation is to hedge against rising prices before they appear. That's what Starbucks does. On its most recent earnings call, CEO Kevin Johnson pointed out the company's policy of locking in coffee prices 12 to 18 months in advance. At the end of July, it had prices of its coffee -- a commodity notorious for volatility -- locked in for the next 14 months. CFO Rachel Ruggeri did acknowledge some headwinds related to inflation, but foresight in its supply chain softens the blow.
Another lever Starbucks can pull is raising prices. It has been one of the few companies with a brand strong enough to increase prices with near impunity through the years. The company uses store-by-store analytics and promotions to steer customers toward premium products and increase prices where it won't hinder growth. That is evident in the average ticket price.
In the Americas segment, the average ticket was up 1% compared with the same quarter last year. It's remarkable given that last year was a 27% increase from the same period in 2019. The average ticket for international transactions climbed only 3% between 2019 and the latest quarter. Still, Starbucks has shown it has several tools in its belt to keep inflation at bay. That flexibility in all economic environments is one reason the stock is up 515% over the last decade and 34,170% since its initial public offering. If you're concerned about inflation, now might be a good time to add shares to your portfolio.
