As investors continue to digest the minutes from the Federal Open Market Committee's March meeting, the stock market remains turbulent. In a nutshell: The Federal Reserve is going to make a serious effort to fight inflation, and higher benchmark interest rates are on the way. That's putting the present values of stocks under pressure.
However, despite the volatility, businesses that have the ability to raise their prices with limited consequences in an inflationary environment should still do exceptionally well. Three Fool.com contributors think Disney (DIS -0.39%), Taiwan Semiconductor Manufacturing (TSM 0.55%), and American Tower (AMT -2.22%) fit that description, and view them as quality names worth a look for investors now.
A premier company in entertainment -- and entertainment technology
Nicholas Rossolillo (Disney): Inflation is blasting consumers these days, but it's been a problem for entertainment businesses for years. With the rapid growth of new streaming services, there's been an explosion in demand for new films and TV series. Add in supply chain issues, and one can understand why entertainment production costs have been skyrocketing at double-digit percentage paces annually.
However, I believe Disney has pricing power in this space. Disney+ is a fantastic product. For fans of Marvel, Star Wars, Pixar, and more, the company's marquee streaming service is the home of the latest and greatest content. Even if Disney boosts the monthly subscription price, I don't see many viewers getting upset enough to cancel. But there's an additional advantage in play here. Disney's technology should help it keep content creation costs in check.
For example, when Mickey and Co. acquired Lucasfilm in 2012, it got more than just the Star Wars franchise. It also got cinematography tech assets like Industrial Light & Magic (ILM). One innovation that has come out of ILM in recent years is StageCraft, visual effects technology that uses walls of LED TV screens for on-set production. Basically, there's no need to send an entire cast and crew to exotic locales for filming anymore, thanks to those mega-sized screens. And multiple "sets" can be quickly changed out on the same day. ILM StageCraft has been used on Disney TV shows and movies, as well as for commercials and music videos.
Disney's vertical integration will work wonders for it if the cost of doing business rises significantly due to inflation. The company owns the whole pipeline of entertainment production, from technology to popular franchises to distribution channels. All told, while Disney continues to rebound from the effects of the pandemic, it boasts a fantastic business model that's built to withstand all sorts of stresses. I expect Disney will grow its revenue at a modest pace in the coming years, but anticipate its profitability will balloon as Disney+ makes progress toward breakeven -- a milestone it's expected to hit in the company's fiscal 2024.
Disney stock currently trades for 23 times forward earnings. With the stock down by some 30% over the last year, I'm a buyer at these levels.
The world's most essential chip producer is already raising prices
Billy Duberstein (Taiwan Semiconductor Manufacturing): When looking for stocks that can beat inflation, look for companies that provide unique, essential services, and can also raise their prices if necessary.
Taiwan Semiconductor is the world's largest semiconductor foundry, and has a lead over competitors in producing leading-edge semiconductors. If you're Apple (AAPL -0.93%) or Nvidia (NVDA 0.90%) and need the most advanced process technology, you need to go with Taiwan Semi -- at least for the foreseeable future. Rivals Samsung and Intel (INTC 1.60%) are attempting to catch up, but that process could take years, if they are able to at all.
Since there's still a semiconductor shortage, and also a scarcity of materials such as silicon wafers, Taiwan Semi is raising its prices. The company actually started that process in August, boosting prices on leading-edge semiconductors by 10% and lagging-edge mature nodes by 15% to 20%. While there are shortages of all types of chips, it's actually the ones manufactured with older processes -- which are widely used in autos and Internet of Things applications -- that have been experiencing the biggest shortfalls. And just last month, it was reported Taiwan Semi would be raising prices for lagging-edge chips by another 10% to 20% in the third quarter of this year.
The price increases announced in August took effect in the first quarter of 2022, so they should lead to stronger results when Taiwan Semi reports on the quarter on April 14. Since Taiwan Semi also regularly reports its monthly revenues, we already know sales grew by 35.8% year over year in January and 37.9% in February. Expect strong revenue growth this quarter, and for Taiwan Semi to hike its 2% dividend in line with revenue and earnings growth later this year.
All in all, demand for semiconductors should continue to increase even if the economy slows down. That's because the growing AI, the Internet of Things, 5G, and cloud computing markets all need more semiconductors. Since it can raise prices to keep up with inflation without fear of losing sales, Taiwan Semi is a stock to buy with confidence amid the tech sector pullback.
The complete package
Anders Bylund (American Tower): For a company to be a reliable hedge against inflation, it should come with a few specific qualities.
- It needs to have staying power for the long run, offering products or services that will be in high demand for decades.
- The stock should be positioned to beat the broader market, either due to a low buy-in price or a history of upward momentum.
- The stock should offer a dividend with a meaningful yield.
Cell tower manager American Tower checks all of these boxes.
It leases out space on cell towers and other wireless network hubs to telecoms around the world. Yes, around the world -- the company name is a bit misleading. Half of American Tower's 2021 revenues came from international assets, and the company's fastest-growing markets are in Africa and Latin America. As long as people need wireless networks, American Tower will be in business.
The stock isn't exactly cheap, trading at 47 times earnings and 13 times sales. You get what you pay for, though -- a high-quality business with industry-leading scale, financial growth, and profit margins. Meanwhile, the stock is down more than 9% year to date in 2022. There should be a serious rebound somewhere in this stock's near future.
And then there's the dividend. As a real estate investment trust (REIT), American Tower is obligated to pay out at least 90% of its taxable income every year in the form of dividends. Otherwise, it would lose the tax benefits that come with its REIT status. As such, you can rest assured that American Tower will keep those payouts coming. At today's share prices, it's delivering an effective yield of 2.1%.
Taken together, American Tower's fantastic long-term growth prospects plus a modest dividend bonus should add up to shareholder returns that far outpace inflation. What's not to love?