An Inflation Follow Up: Company Exposure to Inflation's Effects

In this session, I look at how inflation can affect the value of a company, through its value drivers, from growth to margins to reinvestment and risk. I argue that companies with significant pricing power, with low input costs and investments of short duration and high flexibility will have the strongest ability to pass inflation into their cashflows. The capacity to generate high and stable earnings, with little default risk, will determine how inflation affects discount rates. As a consequence, the effect of inflation, and in particular, unexpected inflation, can vary widely across companies. Looking at the last nine decades of US stock returns, I note that small cap and low price to book stocks have done much better during periods of high inflation. Focusing in on 2022, when inflation has been the lead story driving markets, I document that small cap and low price to book stocks have outperformed markets, just as in the 1970s. Adding on measures for risk and cash flows, it looks like less risky and higher cash flow (operating and dividend) have also outperformed the market. While value investors will view this as vindication, after a decade in the wilderness, it is still too early to draw the conclusion that value is back.
Slides: https://www.stern.nyu.edu/~adamodar/pdfiles/blog/InflationCompanyValue.pdf
Blog Post: https://aswathdamodaran.blogspot.com/2022/05/a-follow-up-on-inflation-disparate.html

Видео An Inflation Follow Up: Company Exposure to Inflation's Effects канала Aswath Damodaran