First Insight CEO Petro: Investors Should Heed Buffett's Advice on Company's Prices

Friday, 08 Aug 2014 10:05 AM

By Dan Weil

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As the legendary Warren Buffett has pointed out, a company's pricing strategy should play a key role in investors' decision of whether to commit money to it, says Greg Petro, CEO of retailer analytics firm First Insight.

According to Buffett, "the single most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business."

But companies apparently aren't devoting adequate attention to the issue, Petro, a former merchandising representative, writes in an article for Forbes.

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

"According to the Professional Pricing Society, fewer than 5 percent of Fortune 500 companies have a full-time function dedicated to pricing," he explains.

"If this is in fact the case, most companies have little to no idea whether they can raise their prices without losing business to a competitor."

Two companies that get it right on pricing are Under Armour and Apple, Petro notes.

Overall, "as retailers are constantly trying to maximize profits, investors would be wise to understand the various pricing approaches employed by their potential portfolio companies," he says.

"Ask yourself, how vulnerable are the companies in your portfolio to price competition? Are they in a position to achieve the highest AUR [average unit retail price] possible?"

Under Armour closed at $67.74 Thursday. Morningstar analyst Paul Swinand has a fair value of only $36 for the stock, though he has good things to say about the company.

"As a leading innovator of performance apparel, footwear, and accessories, Under Armour is establishing itself as a global athletic brand, in our opinion," he writes. "Consumers have shown great affinity for the label across multiple product categories, and retailers have been more than happy to give Under Armour shelf space, reducing their dependence on Nike."

Apple closed at $94.48. Morningstar analyst Brian Colello puts fair value at $87, but he too has good things to say about the company.

"As more consumers are previous smartphone owners, rather than first-time buyers, we think Apple has a good chance to retain a sizable portion of its iOS user base today, and perhaps gain further share at the high end of the market," he explains. "However, although Apple has taken on the strategy of maintaining premium pricing, which may support gross margins in the years ahead, such pricing may weigh on future revenue growth."

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

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